The Demographic Forces Shaping the Post-COVID World

Demographic trends are among the most powerful and predictable forces shaping humanity’s future. We should pay more attention to them.

For the first time in forty years, inflation rates are headline news. Whether or not the higher-than-usual inflation rates seen today are a “transitory” phenomenon or the start of a 1970s-style period of runaway inflation is a subject of increasingly urgent debate. For now, those in charge of fiscal and monetary policy around the world seem content to keep pumping money into the economy. But the inflation hawks are getting louder — and they may yet be proven right, for reasons that don’t often make the headlines.

In The Great Demographic Reversal, the economists Charles Goodhart and Manoj Pradhan argue that inflation is set to return not so much because of any short-run policy decisions but because the macro forces that have kept inflation low for the last forty years are going into reverse. Their view is that the principal reason inflation has been low since the 1980s is because, during that period, the world experienced ‘the largest ever, massive positive labour supply shock.’

Between 1991 and 2018, ‘the effective labour supply force for the world’s advanced economy trading system more than doubled.’ This one-time labour supply shock was driven by several converging forces:

1. The integration of China into the global economy starting in the late 1970s;
2. The integration of Eastern Europe into the global economy following the collapse of the Soviet Union;
3. The arrival of the disproportionately large post-war baby boom generation into the workforce;
4. A substantial rise in the proportion of women entering the workforce.

Together, these trends created a ‘capitalist heaven’ during the period 1980–2020: the massive increase in the size of the global workforce kept labour costs and inflation down — and pushed growth and profits up. Those deriving a substantial portion of their wealth from owning capital have never had it so good — and may never have it so good again.

As the supply of labour relative to “dependents” (ie., children and retirees) declines over the decades ahead, labour’s bargaining power should increase, driving wages higher and profits lower. On the face of it, this is good news for workers — particularly those in advanced economies for whom the era of ‘capitalist heaven’ has brought stagnant wages and rising debts. But higher inflation and lower growth may be the sting in the tail, making it harder for everyone — not just the already rich — to accumulate wealth.

The demographic forces that underpin this story are basically a one-way street: as Darrell Bricker and John Ibbitson argue in Empty Planet, the most important fact about the 21st century may well be that it is the century in which global (human) population peaks and begins to fall. They project the peak will come around 2050 and that, once population decline begins, ‘it will never end.’

Not everyone is progressing along this one-way street at the same pace. Demographic decline has already begun — or is imminent — across much of Europe, North America, China and Japan. But India and Africa are still decades away from peaking — and have, for the time being, fewer old people to worry about.

So can India and Africa replicate the role that China has played in recent decades? ‘Highly unlikely,’ according to Goodhart and Pradhan. Why? It’s partly a question of numbers: there simply aren’t enough Indian and African workers to offset the impact of declining labour supply everywhere else. And it’s partly a question of politics: the backlash against globalisation will make it harder for India and Africa to integrate their burgeoning workforces into the global economy than it was for China and Eastern Europe — as will the fragmented nature of Africa’s political economy and the administrative incompetence so painfully evident in India during the COVID-19 pandemic.

What about automation? Why worry about tightening labour supply in a world where robots are supposed to take most of our jobs? Won’t we face a shortage of work, not workers? This is a topic that divides economists, but the balance of (expert) opinion seems to be shifting towards the view that the scale of aggregate job destruction has been over-hyped. Goodhart and Pradhan argue that ‘we will need all the automation we can get.’ Technology will offset some of the economic impact of demographic decline, but not its entirety.

The consequences of the ‘great demographic reversal’ are by no means all bad: demographic decline is largely a symptom of success — a by-product of prosperity, better education and the empowerment of women. Societies are likely to become less unequal as the bargaining power of workers goes up. And, from an ecological perspective, the slowing of population growth may make it marginally easier to bring our civilisation back within planetary boundaries.

But rising “dependency ratios” (the ratio of non-workers to workers in a population) will create challenges in the form of rising healthcare costs and a tendency towards higher inflation. How policymakers respond to these pressures will be crucial. Only one thing is certain: the playbook that worked (for some) from 1980–2020 will not be much use for what comes next.