Eugenio J. Aleman, PhD, Chief Economist, Raymond James
Giampiero Fuentes, Economist, Raymond James
The global population has surpassed 8 billion and according to the United Nations, it is projected to reach 9.7 billion in 2050.1 However, its growth trajectory reached the lowest level ever recorded in 2022 and is expected to continue to decline. Seems counterintuitive, no? Under the current demographic trajectory, the global population will likely follow a sustained decline for the first time in recorded history starting toward the end of the century.
Two factors are reinforcing this trend. Global life expectancy continues to increase and is expected to reach 77.2 years by 2050.2 This is an almost a five-year increase compared to today’s life expectancy, almost ten years higher compared to 1950, and more than thirty years higher compared to 1900. Second, the level of fertility at which a population replaces itself from one generation to the next, sometimes known as a country’s population replacement levels or total fertility rate (TFR), has been declining steadily for decades. The current world’s TFR is ~2.3 but estimates suggest that the rate will fall below 2.1 around By 2100, 183 out of 195 countries will have fertility rates below population replacement levels.3
With improvements in public health, better living conditions, and overall environmental improvements, it is relatively easy to understand why human life expectancy has increased over the years. Additionally, the number of people living below the poverty line has declined over the last three decades from over 2 billion people to 700 million.4 Fewer people will go undernourished and without access to safe drinking water. These trends are expected to continue, improving the quality of life among developing economies while increasing longevity.
Source: FRED, data as of 31/12/2022
1,2. https://www.un.org/en/global-issues/population
3. https://www.healthdata.org/news-events/newsroom/news-releases/lancet-world-population-likely-shrink-after-mid-century
4. https://www.worldbank.org/en/topic/poverty
Improvements in global quality of life may be contributing to declining fertility rates, especially in developed economies. Many working-class families, especially in rural areas, had numerous children for several reasons. First, children could be considered relatively cheap labour and help around the farm; second, higher child mortality rates meant having more children would increase the probability that the children would look after parents in old age. Fast forward to today and developed economies no longer
need to rely on child labour due to improvements in technology; child mortality rates have declined considerably; and contraception is more available. Moreover, especially in developed economies, the cost of having a child has increased exponentially and families have continued to delay having children.
THE WEST IS GETTING OLD
“So, who’s going to fund programs like Social Security if the population is declining?” you may be wondering. Let’s look at the numbers: in the field of demography, a country’s population dynamic can be illustrated by the distribution of age group and gender. When the population is growing, this distribution is shaped as a pyramid, with more younger people at the bottom, and fewer older people at the top. The charts below illustrate what the United States population looked like in 1900, when the population was growing rapidly and how it looked in 2020.
Over time, the fertility rate in the US declined, the median age increased from ~23 to ~39 years old, and the pyramid started to widen in the middle-aged groups. As this trend persists over time, fewer younger people will mean fewer people giving birth. The bottom line is that over time, with the combination of higher life expectancy and lower births, the US population will likely continue to grow older, running into the risk of having an inverted population pyramid in the future. Of course, the US is far from alone in this respect. Indeed, part of the problem faced by the Euro Area and forming part of the region’s re-emergent risk profile is that in addition to already stretched public finances (well in excess of levels envisaged at inception), exacerbated by the pandemic and subsequent energy crisis in 2022, a significant demographic challenge is emerging to the extent that the average remaining life expectancy after the age of 65 has increased over the past two decades alone from 17.8 years to 19.5 years in 2022. Not only does this put pressure on existing resources, unfunded benefits, including pension payments, will add an additional financial burden for future generations. The US’s TFR has been in a narrow range of 1.7 to 2.1 births per woman since the 1970’s, and it’s been below the replacement level for most of this period. However, during the same period, the US population has increased by roughly 120 million, with approximately half of that surge attributed to net migration. In fact, if it wasn’t for immigration, the US would have likely already joined (or be close to joining) the likes of Japan, Italy, Greece and Portugal in having a shrinking population.
Source: RJ Economics, data as of 30/06/2024
An inverted population pyramid is not good news when it comes to demographics and economics. This is because the age dependency ratio, which measures the dependent population (between the ages of 0 and 14, and older than 65), divided by the population typically in the labour force (between the ages of 16 and 64), increases. Growth in the age dependency ratio means that fewer working people will be available to support more dependents. For example, in the United States in the 1950’s, more than six people supported each dependent, while today there are fewer than four people for each dependent, meaning fewer working-age people carry a larger burden.
A smaller working-age population contributes to shortages of workers and lower production capacity, which ends up hurting economic growth. Similarly, fewer workers means a tighter labour market, which can ultimately lead to higher labour costs as well as upward pressure on prices, i.e. higher inflation. Fewer workers also means lower tax revenues, which could deal additional blows to the already unsustainable pension commitments of governments. This could put even more pressure on the ability of the US government to support government programmes, on fiscal deficits as well as debt levels over time. If these problems are not faced head-on, developed countries may be forced to issue more debt to support their respective ageing populations over time, which combined with large issuance of debt to fight economic crises, only adds to already large national debts long term.
In the United States, Social Security, Medicare, Medicaid, the Children’s Health Insurance Programme (CHIP) and marketplace subsidies spending account for 10.7% of GDP; but according to Congressional Budget Office (CBO) projections, these expenses will account for 14.3% of GDP by 2050. On the other hand, as the working-age population continues to decline, tax revenues are expected to only increase by $1 trillion per year between now and 2050.5 While these projections are developed under current law,
therefore assuming no changes in tax revenues and/or expenses, the increase in the ageing population will continue to have an impact on the US budget.
IMMIGRATION PARADOX
Without a significant uptick in births, the United States will have to maintain, and soon increase, its net migration levels. Enhancements in productivity and the evolution of artificial intelligence (AI) offer hopes of alleviating the situation, but the country will still need more people to meet the growing needs of an ageing population. Thankfully, the US is still considered by many as the land of opportunity, confirmed by the 10.4 million non-immigrant visa approvals and nearly 500,000 immigrant visa approvals issued in
2023.6 The large number of immigrants to the US over the last few
5. https://www.cbo.gov/system/files/2024-02/59710-Outlook-2024.pdf
6. https://www.boundless.com/blog/state-department-visa-report/
Enhancement in productivity and the evolution of artificial intelligence (AI) offer hopes of alleviating the situation, but the country will still need more people to meet the growing needs of an ageing population. Thankfully, the US is still considered by many as the land of opportunity, confirmed by the 10.4 million non-immigrant visa approvals and nearly 500,000 immigrant visa approvals issued in 2023.
Current immigration policies are unlikely to be adequate to meet the needs of the US economy.
years has increased the supply of available workers, allowing the country to add a record number of jobs without putting excessive pressure on wages, and ultimately additional unwanted pressures on inflation. However, despite this large number of immigrants, the US still has ~8.5 million job openings that are going unfilled as employers struggle to find workers.
When it comes to immigration, US economic policies have not been updated since Ronald Reagan signed the Immigration Reform and Control Act in 1986, which requires employers to confirm employees’ immigration status before hiring them. However, this policy hasn’t been revised in over three decades (minor changes were implemented in 1990) and the annual immigration caps of the various visas are unlikely to be adequate for the needs of the US economy. For reference, real GDP in the US was $8.9 trillion in 1990 and it’s now ~$23 trillion. The economic benefits of immigration reform would expand beyond addressing demographic shortfalls, but it could, for example, boost reshoring efforts as employers would be able to hire more skilled workers. Furthermore, proper immigration reform could reduce illegal immigration by providing additional pathways to those currently trying to come in illegally.
An increase in immigration typically addresses labour shortages in affluent nations like the US and other developed economies, while simultaneously alleviating issues with job scarcity in developing economies. Therefore, proper immigration reform alone could provide some relief to the declining demographics of the US economy and developed economies more generally, but it is unclear when or if the immigration quotas will be increased. However, the combination of additional labour and an increase in productivity could be the catalyst for future economic growth.
IMMIGRANT CONTRIBUTIONS
Immigrants in the US account for ~13.6% of the US population and 78% of them are of working age. Just like native-born residents, immigrants use public services like education, healthcare and public safety, but according to the American Immigration Council, “immigrants’ economic contributions far outweigh the cost of additional public services they incur”. This segment of the population contributes over $500 billion a year in taxes, and it is estimated to have a spending power of approximately $1.4 trillion. Immigrant workers fill critical labour shortages in agriculture, hospitality, healthcare and service jobs, and also in highly competitive STEM industries (science, technology, engineering, mathematics).
Immigrants have historically supported job creation in the US, with 45% of Fortune 500 companies founded by immigrants and/or children of immigrants, according to a study published by Brookings.1 Similarly, according to the National Foundation for American Policy,2 65% of the top AI companies in the US are founded or co-founded by immigrants, while 70% of full-time graduate students in AI-related studies are international students.
