Harmful effects of the ageing population on the economy

A study from the School of Economics has found that an increase in Asian elderly population share will significantly lower economic growth due to decreased labour participation in the region.

The results of the study implies that governments facing population ageing have a challenging task to provide social security and public services for the aged while maintaining economic growth. This fundamental issue is common across all economies around the world.

Many Asian economies are currently faced with the challenge of rapidly ageing population, which can be harmful to the economy in the long run. The study, conducted by Dr Keisuke Otsu from the University’s School of Economics with the results published in Asian Development Review, analysed the effects of projected population ageing on potential growth in Asian economies over the period 2015–2050 using quantitative assessment.

Population ageing could lead to an increase in government consumption due to the rise in the demand for health care. The study estimates the future increase in government expenditure in Asia and finds that the increase in aggregate demand would lead to a 0.05 percentage point increase in annual per capita GDP growth rate above its potential.

However, the increase in government consumption can lead to a decline in aggregate productivity by shifting away economic activity in the more productive private manufacturing sector to the service sector. The study estimates the effect of population ageing on future productivity growth in Asia and finds that this effect could reduce the annual per capita GDP growth rate by 0.40 percentage points below its potential.

The paper concludes that population ageing is harmful for economic growth due to the decline in labour participation rate and its negative effect is significantly magnified through the increase in social security tax and the slowdown in productivity growth. This provides quantitative support for arguments for social security reform and innovation policies in ageing economies.

Dr Keisuke Otsu describes some of these trends in his Think Kent video. The Think Kent series are short videos which give an overview of Kent academics and their research and teaching expertise.