I enjoyed reading this paper, particularly so because I was writing a paper on aging and its impacts on the German labor market at the very same time that Jane Little and Robert Triest were developing their paper. Their interesting, broad-based, and thoughtful analysis has a decidedly American point of view. My main duty as a discussant, therefore, is to compare their analysis and their projections with a European perspective.Demography ; Economic conditions ; Labor market

Axel H. Boersch-Supan

English

Research Papers in Economics

THE IMPACT OF DEMOGRAPHIC CHANGE ON U.S.
LABOR MARKETS:D ISCUSSION
Axel H. Boersch-Supan*
I enjoyed reading this paper, particularly so because I was writing a
paper on aging and its impacts on the German labor market at the very
same time that Jane Little and Robert Triest were developing their paper.
Their interesting, broad-based, and thoughtful analysis has a decidedly
American point of view. My main duty as a discussant, therefore, is to
compare their analysis and their projections with a European perspective.
Let me ﬁrst stress that for both Europe and the United States,
population aging is indeed a “dramatic change.” Dependency ratios will
double on both sides of the Atlantic (and, by the way, the Paciﬁc), and all
sorts of adjustments will have to follow, from social policy institutions to
macroeconomic aggregates. The levels from which the dependency ratios
double, however, are rather different. And the institutional backgrounds,
on which the adjustments have to work their way out, are remarkably
different between Europe and the United States.
Today’s Germany has essentially the demographic structure that the
United States will reach in a quarter of a century. The dependency ratio
(the ratio of persons aged 65 to those ages 20 to 59) is at 28 percent, and
it will reach 75 percent in 2075, if we dare project that far. Almost
one-ﬁfth of the German population today are aged 65 and over. One-
quarter are aged 60 and over, which is relevant because the average
retirement age in Germany is 59.5 years. Thus, in this sense the United
States is not “entering largely uncharted territory,” as Little and Triest
state in their introduction. Rather, they can look to Europe—in particular
to Germany and Italy—to see what will happen in the United States.
*Director, Institute of Economics and Statistics, University of Mannheim.The sight is not entirely pretty, I am sorry to admit. Germany, with
its mainly pay-as-you-go-ﬁnanced pension and health care systems, has a
social contribution rate of about 35 percent in addition to an average
payroll tax of 25 percent (as percentages of total labor compensation). The
negative incentive effects on labor demand and supply are a major—I like
to argue the main—challenge to functioning labor markets. The number
one policy priority must therefore be cost containment and, thus, beneﬁt
reduction in all branches of the social security system—Social Security,
Medicare, and the smaller complementing branches.
Although this is less than a novel insight, I missed such a stress in
Little and Triest’s paper from the outset. The United States may be ahead
of the large continental European countries in terms of social security
reform, but it is still behind the United Kingdom, the Netherlands, and
Switzerland in this respect, making the point still timely and still
necessary. The indirect effects of social security reform are also very
important in any assessment of how labor markets will look in the future.
Capital deepening and productivity gains will depend quite dramatically
on social security reform. International trade and capital ﬂows have
important feedbacks to the labor market, essentially through the mecha-
nism of capital deepening.
All ﬁnancing problems are easier with faster growth. Thus, policy
priority number two is helping to increase productivity. This is the main
theme of Little and Triest’s paper, and I could not agree more. Let me take
the opportunity to share some results of my companion paper on aging
and the German labor market, as a thread along which to discuss some of
Little and Triest’s points.
Between the years 2000 and 2050, the German labor supply will go
down dramatically. If you look at the support ratio, which is the number
of workers per adult person, the decline amounts to about 0.5 percent per
annum. The decline translates into one-third of the German rate of
productivity growth, and that is the important number: One-third of
productivity growth will be eaten up simply by demographic changes. By
the same token, in order to offset these effects of aging, Germany (and
similarly, the United States, although the numbers are not as large) must
achieve productivity growth one-third higher than that of the past twenty
years, and that will not be an easy task. So saying that this is a minor
problem is not quite correct. Increasing productivity growth by one-third
for a long stretch of time, twenty-ﬁve to thirty years, is quite a feat, and
we will have to work hard for that.
Even more dramatic, of course, will be the change in the pension
system’s dependency ratio, which forecasts the number of pensioners
divided by the number of workers. The ratio will double in Germany as
in the United States, but the level in Germany will be one-to-one in
twenty-ﬁve to thirty years: We will have as many retirees as workers. You
DEMOGRAPHIC CHANGE ON U.S. LABOR MARKETS: DISCUSSION 169can imagine that this will just break the system. It will create huge
incentive effects for the younger generations who have to pay the taxes,
and these incentive effects are exacerbated, as David Weil has already
said, by the tendency to go into retirement very early in Europe. The
amazing thing is that people are aware of the problem and are actually
willing to at least take some steps toward reform, yet reform still is not
really moving forward in Germany, nor in Italy, nor in the United States.
I think that is the main reason to put social security reform as the top
priority, priority number one, when you talk about labor market prob-
lems generated by aging. The United States is advanced relative to
Germany and Italy in terms of the distribution of pay-as-you-go funding,
but it is way behind the Netherlands and Switzerland and the United
Kingdom. A lot still remains to be done to reform Social Security in this
country.
My second point looks a bit more at the issue of productivity, and I
want to go beyond what Little and Triest call their “incredibly simple”
regression analysis. I would rather look a little at the structure behind it.
The age distribution of the workforce in Germany will change quite a bit
between 2000 and 2050. The mean age will increase from 39 to 43.5 years,
and the share of workers age 55 and over, now about 11 percent, will be
one-quarter of the working population in 2050.
Now, if you look at age-speciﬁc productivity, essentially rough
guesses about how productivity changes with age, the changes look very
dramatic. Actually, if you project them onto the age distribution of the
population, they turn out to be rather small, and that is an important
point. The shift in age-speciﬁc productivity among workers will have
some effects, but they will be relatively small in relation to the effect of the
decline in the sheer number of workers. In the next thirty years in
Germany we will lose about 3 to 4 percent of productivity through this
aging mechanism, as compared to the 15 percent that we will lose
through a lack of workers. So that aspect of aging can be put off the table.
The other factor I wish to mention is capital deepening. Modeling
capital deepening is very difﬁcult, and it requires a model that shows the
feedback effects of both pension reform and international trade and
capital ﬂows; otherwise you mispredict quite heavily. (I am curious about
what Jeffrey Williamson will tell us tomorrow.) In forecasting capital
deepening, I used an overlapping generations model that models all
major trade partners of Germany simultaneously, so it is really a feast of
a model. (Actually, I did this for the German Bundesbank.) What you see
from the solid black line in Figure 1 is that the amount of capital intensity
will increase just because of the normal technical productivity curve, but
then you see two additional curves. One shows the results if we have a
major social security reform in Germany, the other the results if we just
stick with a pay-as-you-go system. As you see, there will be no effect on
170 Axel H. Boersch-Supancapital deepening, no increased capital intensity or related increases in
labor productivity, if we stick with the current pay-as-you-go system.
One needs a major pension reform to get the capital deepening effects
going. If you translate these numbers into labor productivity, you see that
in any case, some labor productivity gains will occur, but the real bang
you get only for the huge buck of having pension reform ﬁrst. That is the
top line in Figure 1.
Another aspect, which may not be so relevant for labor markets in
the United States but is very relevant for labor markets in Europe, is the
quite large amount of additional sectoral ﬂuctuation that will occur.
Labor markets will look different just because of the changed composition
of what will be produced twenty or twenty-ﬁve years from now. In a very
rough kind of analysis, Figure 2 shows age-speciﬁc consumption patterns
in Germany. The third category from the top is communications, partic-
ularly trafﬁc and traveling, which goes down quite dramatically by age.
The one below is out-of-pocket health costs and this category doubles,
almost triples with age. It is easy to guess that the demand for health care
will increase for the reasons of demographic change. But other structural
change will be going on, for example, technical progress in health care,
which comes in addition to that.
Applying sectoral-speciﬁc productivities here implies that about
one-ﬁfth of the German workforce will have to be shifted from one sector
to another, simply because of population aging (Figure 3). In the United
DEMOGRAPHIC CHANGE ON U.S. LABOR MARKETS: DISCUSSION 171172 Axel H. Boersch-SupanStates, with its fairly ﬂexible labor market, this may be easy. In Europe,
with very inﬂexible labor markets, the shift will not be easy to achieve. In
particular, most of the change will occur over a period of about ten years.
The entire change will happen over thirty years, but most of the change
in the age structure will occur in the ten-year period between 2010 and
2020. We have already experienced stretches of structural unemployment
lasting longer than ten years. Structural changes in the market for goods
will have a powerful impact on sectoral labor markets, and so I believe
this is yet another thing the Europeans have to consider, if they are
concerned with the implications of aging on labor markets.
Again, I think policy priority number one, and you all know this
more or less, must be to clean up the social security systems, and I put an
“s” in because I also include Medicare here and in Germany the health
care system. It is an obvious point but it has to be said again and again,
because of both the direct incentive effects and the indirect feedback
effects, for example in capital deepening. Priority number two is in-
creased productivity. I could not agree more with Little and Triest that
education is the key here, and particularly education in the large
underprivileged sectors of the population, for example, the Hispanic
population.
Priority three, more relevant to Europe than to the United States, is
to alleviate the current problems preventing secular mobility. That is a big
task that Europe must face. I would put under questionable policies those
of incentives for people to have more children or to attract more migrants
to Germany. In considering such incentives, we are talking about the
policies of the 1930s, and I am quite glad we are not talking about this
right now in Germany, because we are happy to have put those times
behind us. Immigration might help a little bit, but it will not solve the
aging crisis: The numbers just do not work out. It is very important to say
this because, as I mentioned earlier, some politicians think immigration
will solve the problems and then we will not have to cut the social
security system, which is obviously an unpopular prospect. But immi-
gration will not solve the problem—that miracle just will not happen.
In summary, what do we learn from these tales of two countries? The
United States, being in a much earlier stage of population aging than
Germany, can still avoid many of the economic problems Germany is
facing now, in particular the very high tax and contribution levels
required because of too-often-postponed pension reform. As I pointed
out before, policy priority number one must be to remove the pressure
from the pay-as-you-go social security systems. This point is mentioned
but underrated in the Little-Triest paper. Pension reform has also many
indirect feedbacks to labor markets, for example, through capital deep-
ening. The Kotlikoff-Smetters-Walliser argument is to be understood as a
warning about what is likely to happen if no pension reform takes place
DEMOGRAPHIC CHANGE ON U.S. LABOR MARKETS: DISCUSSION 173in the United States—by the same token, pension reform helps produc-
tivity through this channel.1
Second, international relations are important also for labor markets.
Again, the arguments are subtle: diversiﬁcation advantages overcoming
the Feldstein-Horioka barrier, but mainly the general advantages of trade
if factors (here, labor) become differentially scarce in different countries.
My multi-country overlapping-generations model delineates the welfare
gains from trade from a German point of view. For Europe, this is a very
important aspect, since the introduction of the euro removes all exchange
rate risks. Because the timing and the extent of aging are quite different
across the EU member states, the introduction of the euro changes the
arena signiﬁcantly, from a national economy to a EU-wide focus. Home
country bias may be stronger in the United States—nonetheless, interna-
tional capital ﬂows are an important factor there as well in assessing
capital deepening and its productivity implications.
Third, since population aging is slow and shallow in the United
States relative to Europe, immigration might help more there than in
Europe. No realistic immigration rates can compensate for aging in
Europe. The skill question, so much in the foreground of Little and
Triest’s paper, takes on different facets in Europe. As we have shown,
aging implies large additional shifts in labor demand by sector. Europe,
with its inﬂexible sectoral structures and stress on skill specialization, will
have a much harder time coping with that aspect of aging than will the
United States. Hence, Europe must develop broad and general skills that
make sectoral transitions easier.
1 The welfare effects, however, are complicated because of the transition burden, and
they depend on “second-order effects” such as labor and capital market efﬁciency gains
other than the direct effects of capital deepening.
174 Axel H. Boersch-Supan

The impact of demographic change on U. S. labor markets: discussion

http://www.bostonfed.org/economic/conf/conf46/conf46e2.pdf

The impact of demographic change on U. S. labor markets: discussion

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