Young Whipper Snappers plus Gray-Haired Veterans equals Productivity?

The following article poses an interesting idea – namely, that productivity in developed countries will suffer as the proportion of older workers (and retirees) grows because “companies with a higher proportion of workers aged over 55 are less likely to adopt new technologies than firms with a high share of workers under 30” and technology is one of the levers developed countries could pull to goose productivity and to offset its aging populations. On the other hand, older workers can bring a wealth of tacit knowledge and expertise. It makes for an interesting organizational design thought-experiment: perhaps a good design for a company is bimodal: a bunch of young whippersnappers and a bunch of gray-haired types.

Where is growth in the developed world going to come from? Growth is vitally needed to bring down unemployment and to reduce the burden of debts incurred in both the private and public sectors over the past 20-30 years. But rich-world economic growth in the 21st century has so far been sluggish compared with previous decades.

One problem seems likely to weigh heavily on growth: it is fairly certain that, in the absence of mass immigration, the absolute number of workers in many European countries will fall over the next 20 years. That will make it even more important to improve productivity if overall output is to grow (and if the retired are to receive their promised pensions). But as Fredrik Nerbrand of HSBC, a bank, argues in a research note, productivity gains seem harder to generate with an ageing workforce.

Workers in their 20s and 30s are likely to show the fastest marginal increases in productivity as they receive formal training and get more experienced at their jobs. It is hard to define an exact age at which productivity starts to decline. The answer will vary from industry to industry and from worker to worker.

Aptitude tests show that 45- to 54-year-olds have below-average scores in areas such as motor co-ordination and numeracy. A survey of the academic literature found that declines were important after the age of 50 in areas requiring speed and problem-solving but not where experience and verbal ability were significant.

The declining importance of manual labour in developed economies could make older workers more productive for longer. Conversely, the increased importance of technology may take its toll. The young are enthusiastic users of smartphones and social media. Studies find that companies with a higher proportion of workers aged over 55 are less likely to adopt new technologies than firms with a high share of workers under 30.

Mr Nerbrand makes the assumption that worker productivity peaks somewhere between the ages of 30 and 50, and declines more quickly after the age of 55. On that basis, he thinks the most likely indicator of future changes in productivity will be what he dubs the grad-to-granny ratio: the relationship of those aged 20-29 to those aged 55-75. This ratio is declining almost everywhere in the world. By 2030 there will be only half as many grads as grannies in western Europe, and less than that in Japan.

There are some interesting differences between countries. Germany’s demographic outlook, for instance, is deteriorating rapidly as a large 40- to 50-year-old cohort starts to approach retirement. That may help explain why German politicians have been so reluctant to assume the burden of other European countries’ debts. In relative terms, the outlook for France and Britain is more positive. The developing world is starting from a better position but it is bound to get worse. China’s demographic profile looks like a replay of Japan’s with a 20-year lag; its grad-to-granny ratio will be lower than that of America by 2030.

It is all very well to describe a theoretical relationship between demography and productivity growth, but is there a link in practice? The sluggish performance of Japan’s economy over the past 20 years is well-known, although some would ascribe this to incompetent policy as much as demography. Nevertheless, as the chart shows, the country’s productivity has been growing more slowly over the past 30 years as Japan’s population has aged. The outlook, on Mr Nerbrand’s analysis, is for a further deterioration.

Of course, demography is not the only factor affecting productivity, and might not even be the most important. Technological change—3D printing and robotics, for example—or the emergence of shale oil and gas as cheap forms of energy may deliver a big boost. In Europe structural reforms, such as eliminating cartels or reducing labour-market distortions, may provide further momentum. Some countries could add many more women to the workforce; Italy has the fourth-lowest female employment rate in the OECD, for example. But if Mr Nerbrand is right, then these factors will have to make a very big difference indeed for developed countries to overcome the burden of their ageing populations. (Source: The Economist)