The Effects of Demographic Changes on Economic Growth: The Case of OECD Countries

 



Published on December 29, 2021
Published by Population & Strategy Analysis Division

 

   Korea is facing drastic changes in its demographic structure which have been caused by the rapid decline in its fertility rate and the rise in its elderly population ratio. This report aims to analyze the effects of these changes in demographic structure on its economic growth trajectory in the mid- to long-term, identify response proposals and policies of OECD countries, and provide references on sustainable growth strategies for Korea.
   Until the 1990s, the population and economy of OECD countries grew in parallel, but since the 2000s, demographic change paths took different turns by country and region. As for the countries with fast population aging, a strong correlation was found between changes in their demographic compositions by age group and their economic growth rates. Meanwhile, countries where policy interventions were implemented to increase labor force participation rates or encourage automation-driven productivity improvements seem to have offset the negative effects caused by declines in labor productivity of those countries.
   Panel regression analysis using OECD country data for the period 1960-2019 illustrates that the share of population aged 30-64, which is the core working age group, was found to have the most significant impact on the economy. If the age group of those 65 and over increases by 1%p and those aged 30-64 fall by 1%p over 5 years time due to aging, the average annual economic growth rate will fall by roughly 0.38%p. Furthermore, when populations increase by 1%, the annual average economic growth rate rises by 0.18%p, indicating that increases in total populations have a positive effect on economic growth. In the meantime, although the negative effects of aging on economies were as high as 0.47-0.54%p before 2000, they fell to 0.19-0.25%p after 2000, suggesting that the polices to counter aging by OECD countries have had positive effects.
   To alleviate the negative impact of demographic changes, OECD countries have responded by expanding working-age populations, enhancing productivity, and raising labor participation rates. Particularly, overseas migrants (immigration) have been actively promoted to address labor shortages and they have had a positive effect on economies, but the possible social costs incurred from immigrant polices have been a constant concern. They also tried to control the decline in labor productivity through automation in production and services, and considered ways to enable balanced growth between sectors and age groups during automation processes. Additionally, the increased labor participation rate of women following the implementation of family policies and gender equality-driven labor policies have had a positive effect on economic growth, and the extension of the retirement age could be reviewed as ways to raise labor participation of the elderly.