December 07, 2011
The media regularly gives us stories about the impending demographic disaster in Japan because of its low birth rate and declining population. Today, in the context of an article about the clean-up from the accidents at its nuclear reactors last spring, the NYT told us Japan’s problems are even worse than we thought:
“The Soviet Union did not attempt such a cleanup after the Chernobyl accident of 1986, the only nuclear disaster larger than that at Fukushima Daiichi. The government instead relocated about 300,000 people, abandoning vast tracts of farmland.
Many Japanese officials believe that they do not have that luxury; the evacuation zone covers more than 3 percent of the landmass of this densely populated nation.”
So we now learn that Japan is not only suffering because it has a declining population, but also because it is a densely populated country. Can things get much worse?
In reality, the demographic story is silly. The alleged problem is a decline in the ratio of workers to retirees. (The correct measure is the ratio of workers to non-workers, the latter would include children.) In a healthy economy, the rise in productivity growth swamps the impact of even very negative demographic trends.
For example, going from 3 workers to retiree to 2 workers per retiree over a 20 year period (an extremely fast rate of decline) would imply that the share of workers’ wages going to support retirees would have to increase by 0.6 percentage points annually, assuming a 70 percent replacement rate for retirees. This is 40 percent of the 1.5 percent annual productivity growth in the years of the productivity slowdown (1973-1995) and 24 percent of the 2.5 percent annual productivity growth in the years since 1995.
This means that in a healthy economy workers can continue to enjoy substantial increases in living standards even during years in which the demographic trend leads to a sharp increase in dependency ratios. Insofar as this is associated with a declining population, there are many gains associated with less crowding and less pollution that will not show up in GDP statistics.
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