Declining population and GDP growth

There is a general idea among businesspeople and mainstream economists that a decreasing population is not good for the economy. Our empirical work on countries experiencing population decline suggests that a declining population can bring about changes that reduce unemployment, increase wages, and lead to a larger real GDP per capita.

by Theodore Lianos and Anastasia Pseiridis

Many economists are afraid of population decline and stable populations — and even growing populations at low rates — because all of these may lead to lower investment and secular (long-term) stagnation. This idea was introduced in 1938 by Alvin Hansen in his presidential address to the American Economic Association, who expressed fears that if population declines, an important outlet for investment will be closed (Hansen, 1939).

It is interesting that a year earlier Keynes (1937) was arguing for population stability by saying that, with no major wars and no important increases in population, the economic problem might be solved within a hundred years. Also Schumpeter (1942, chapter X) argued that population ageing and population decline need not restrict output either from the demand side or from the supply side.

However, mainstream economists today ignore Keynes and Schumpeter and side with Alvin Hansen. In fact, the modern world has been one of increasing population, so most theoretical and empirical work in modern economics has focused on the workings of economies with increasing populations. Throughout the years, constant population increase was considered a given. Signs of change (e.g. falling birth rates) have come to be perceived as a threat to the fundamentals of the economy’s smooth working. This may explain why falling growth rates of population often produce fears of global destruction among the general public, policymakers, businesspeople, and professional economists. The result? These people apply their intellectual tools and means of persuasion to reverse the trend (e.g. motivate people to birth more children), rather than understand this new type of economy and facilitate the transition to a steady-state prosperous economy working inside its planetary limits (Lianos, 2018).

Of course, an increasing population can be beneficial to businesses: it increases the number of working people, it keeps wages low, it increases the number of consumers, and it ensures land values rise, all contributing to maintaining or growing the profits of large corporations, even if it intensifies competition and risks for small businesses and start-ups. On the other hand, a decreasing population may bring several changes to the economy which increase the well-being of people. It also reduces environmental problems and global resource use at the same time.

Our recently published paper is the first empirical work we know of that examines countries with falling population size (Lianos et al., 2023).

It is neither an examination of countries with falling birth rates, nor of countries with changing age structures, as these do not always mean that the absolute number of people is falling. We do not examine demographic variables (like median age or fertility rate); instead, we examine macroeconomic variables (like per capita GDP) in countries with declining populations. Sixteen of them are countries of the ex-Soviet bloc in which the reduction of population is the result of outmigration and low fertility rates after the dissolution of the Soviet Union in 1990. We also studied Japan, Italy, and Portugal, developed capitalist countries which experienced population decline more recently. (China, with 185,000 fewer people in 2022, according to World Bank data as of October 2023, has been added to this group of countries.)

We examined the changes that took place in real GDP, real GDP per capita, labor force participation, and rate of unemployment. Summary data for the countries we examined are shown in Table 1 below.

Table 1. Change in real GDP (total and per capita), population, labour force participation, and unemployment for 19 countries 2000-2020. Sorted by % of population change.

In short, in most countries both real GDP and (especially) real GDP per capita increased more than the world average. Also, compared with the rest of the world, the rate of unemployment was more likely to have fallen, and labor force participation more likely to have increased in most countries. Also, we observed that real wages increased during the same period. In other words, none of the unwanted effects that are feared actually happened. Our econometric analysis, using the pooled mean group (PMG) estimation method, shows that although population size is a statistically significant factor, it makes almost no difference to per capita GDP.

The decline of population may cause an increase in the labor participation rate, particularly if population reduction is accompanied by higher wages and more opportunities for employment. Also, unemployed people may find jobs more easily and therefore the unemployment rate may fall. It is also reasonable to expect that as labor becomes scarcer and wages increase, labor saving technologies may be introduced in the production process leading to higher per capita product, more efficient use of labor, and reorganization of business.

Population decline may lead to lower consumption and lower investment in capital that is needed for expanding the production of consumption goods and services. But it may also lead to a change in the pattern of consumption. For example, the part of income that was intended for the care of the second or third child may be spent for better care of the first one or two (better education, healthcare, etc.) or for a more comfortable life (bigger house, more traveling, etc.). Also, the propensity to consume may increase as low-income families earn higher incomes (because of higher wages and higher participation in the labor market) and therefore feel less uncertain about their economic situation.

Other changes of economic significance may also take place as a result of less population. For example, the fall in population density, particularly in big cities, may reduce commuting time and increase leisure time and the demand for goods used at leisure time. Also, a smaller population in high population density cities may reduce crime rates and the costs associated with citizens’ protection and thus government money may become available for other uses. Agricultural land per capita will increase, farm fragmentation may be reduced, the least-productive land might be returned to nature, and thus productivity in the agricultural sector may increase. Smaller families will mean increased bequests per individual and therefore more wealth per family and higher propensity to consume, etc.^[1]

To the factors mentioned above, some additional ones can be mentioned which are relevant for the countries included in our study. The dataset we use in this paper covers a short period in the recent economic history of nineteen countries, sixteen of which were members of the Soviet Union or the Soviet bloc, or their political regime was not democratic. Therefore, the fall of the Soviet Union in 1992 brought drastic changes to their political system and their economy. Six of them are relevant to our examination of the effects of population reduction.

1. All of these countries experienced flows of emigration mainly to European countries.
2. Emigration also meant loss of young and educated labor force.
3. Migrant remittances increased disposable incomes and consumption of their families in the country of origin.
4. The reorganization of firms according to the free-market system may have introduced technological innovations in production methods.
5. Significant capital flows may have been invested in these countries.
6. The political liberties that allow freedom of choice may raise productivity because young people can choose professions in which they have an inclination or a talent and thus become more productive.

The last three factors, i.e. reorganization of firms, foreign investment, and political liberties, are expected to have resulted in significant increases in labor productivity.

To conclude, our results provide support for a positive outlook for population decline. While acknowledging that most of these countries share an unusual set of circumstances (related to the collapse of the Soviet Union) that will not be replicated elsewhere, these results go some way toward dispelling the fears that a declining population may be a destructive force for an economy. The fears of large corporations are partly justified, as scarcer labor can demand higher wages and hence appropriate a larger part of businesses’ supernormal profits. But this is good news for the well-being of people. A smaller global population is also good news for our sustainability goals (Dodson et al., 2022; Götmark et al., 2018; Lianos & Pseiridis, 2016, 2021; O’Sullivan, 2023). We believe that more economists should work on this new kind of economy, the declining population economy. In so doing they could facilitate the well-being and environmental sustainability of these countries and the global economy as well.

References

Coleman, D., & Rowthorn, R. (2011). Who’s Afraid of Population Decline? A Critical Examination of Its Consequences. Population and Development Review, 37(s1), 217–248

Dodson, J., Dérer, P., Cafaro, P., & Götmark, F. (2022). Population growth, family planning and the Paris Agreement: An assessment of the nationally determined contributions (NDCs). International Environmental Agreements: Politics, Law and Economics, 22(3), 561–576

Götmark, F., Cafaro, P., & O’Sullivan, J. (2018). Aging Human Populations: Good for Us, Good for the Earth. Trends in Ecology & Evolution, 33(11), 851–862

Hansen, A. H. (1939). Economic Progress and Declining Population Growth. The American Economic Review, 29(1), 1–15

Keynes, J. M. (1937). Some economic consequences of a declining population. The Eugenics Review, 29(1), 13–17

Lianos, T. P. (2018). Steady State Economy at Optimal Population Size. Journal of Population and Sustainability, 3(1), 75–99

Lianos, T. P., & Pseiridis, A. (2016). Sustainable welfare and optimum population size. Environment, Development and Sustainability, 18(6), 1679–1699

Lianos, T. P., & Pseiridis, A. (2021). Adjusting GDP for ecological deficit: The Index of Debt to the Future (IDF). SN Business & Economics, 1(3), 42

Lianos, T. P., Pseiridis, A., & Tsounis, N. (2023). Declining population and GDP growth. Humanities and Social Sciences Communications, 10(1), Article 1

O’Sullivan, J. N. (2023). Demographic Delusions: World Population Growth Is Exceeding Most Projections and Jeopardising Scenarios for Sustainable Futures. World, 4(3), 545–568

Schumpeter, J. A. (1942). Capitalism, socialism, and democracy (First edition). Harper & Brothers.

[1] Additional consequences of population decline are discussed in Coleman and Rowthorn (2011).