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Demographics for Prosperity

Societies seeking long-term economic growth can find it by accentuating the earning power of young workers, near-retirees, and women.

In 1930, British economist John Maynard Keynes published a visionary essay called “Economic Possibilities for Our Grandchildren” (pdf). “It is common to hear people say,” he wrote, “that the epoch of enormous economic progress which characterized the 19th century is over.” This was, after all, the first year of a massive global depression. But Keynes disagreed. Instead of decline, he predicted the world would experience unparalleled economic growth. In 100 years’ time, global economic output per person could, on average, be up to eight times as great as it was in 1930. He suggested that many people would want to work less as a result, and a three-hour day or a 15-hour week could become the norm.

In 1930, in the first year of a massive global depression, Keynes predicted unparalleled economic growth by 2030. He was right.

Today, with only 14 years left before Keynes’s target date of 2030, it seems that he was broadly right about economic growth. Average income, at least in advanced economies such as the U.S. and the U.K., is already around six times as great as it was in 1930. But his crystal ball was foggier on the subject of leisure time. Indeed, work has remained central to the lives and livelihoods of most people in industrialized society, even as average incomes have risen.

Despite the progress, though, two prevailing trends have led to renewed fears about the future of economic growth. The first is the aging populations of advanced economies — in particular, those of the countries that are members of the Organisation for Economic Co-operation and Development (OECD). This trend has been linked to the grim prospect of “secular stagnation,” the theory that without a continually renewed young labor force, there won’t be enough production or consumption to support a vibrant economy, and GDP growth could level off indefinitely.

The second worrying trend, at least from a labor markets perspective, is technology. Many believe that an army of increasingly intelligent robots will take most jobs away from the young, leaving a generation of unemployed and unemployable people with no opportunities to build a broad and healthy middle class.

For higher levels of prosperity, a country’s greatest leverage is a flexible, well-trained, and resilient workforce.

The labor market performance data, however, tells a very different story. It suggests that broad prosperity is still possible, but that the means for achieving it are fairly specific — and not at all obvious. The clues lie in the differences among various countries in the OECD, particularly in the government policies and business practices related to women, education, and retirement. If the goal is to reach higher levels of prosperity, a country may find its greatest leverage in policies and practices that encourage a flexible, well-trained, and resilient workforce.

Tracking the Labor Market

At PwC, we have developed three relevant labor market indexes, listed below. They allow us to compare these policies and practices, and their effect on economic growth, in a wide range of countries with a relatively high level of precision.

  • The Women in Work Index (pdf): a weighted average of five indicators covering female employment and unemployment rates, both in absolute terms and relative to men, and the gender pay gap
  • The Golden Age Index: a weighted average of seven indicators covering the employment, relative earnings, and training rates of people age 55 to 69
  • The Young Workers Index: a weighted average of eight indicators covering different aspects of the labor market activity and educational participation of people age 15 to 24.

The logic behind these indexes is that because labor market performance is a multidimensional phenomenon, it is better to look at a range of indicators than to just focus on, say, employment or unemployment rates. In any country, the gender pay gap — the difference between male and female earnings for equivalent professions — is a revealing indicator of the opportunities available for women. But so is the split between full-time and part-time employment rates. For younger people, participation in education and training is at least as important to long-run economic prospects as current employment rates are. For older workers, relative pay rates and participation in training, as well as the average ages at which people exit the labor force, are important factors.

Our indexes combine these elements and allow comparisons both among countries and over time. They cover slightly different sets of countries depending on data availability (we have only partial results for Iceland, Estonia, Chile, Mexico, Luxembourg, Slovenia, and Turkey). But even with partial results, the comparisons are eye-opening (see Exhibit 1).

 

Paths to Prosperity

The Scandinavian countries perform consistently well: Norway, Denmark, and Sweden are in the top five of the overall rankings, and Finland is in the top 10. These countries score particularly high on our Women in Work index, reflecting their strong publicly funded child-care programs and their relatively generous parental leave arrangements for both mothers and fathers. The indexes also show smaller gender pay gaps and high employment rates for older women. More Nordic women remain in the workforce after having children than do women of other countries. For Iceland and Estonia — which has strong economic and cultural links with Finland — we lack the data needed for the Women in Work index, but those countries are also ranked high in the Young Workers and Golden Age indexes. Among the Nordic countries, there is only one somewhat low ranking, and that’s Sweden’s young workers score.

The economic benefits of emulating Nordic performance could be huge. For example, if the United Kingdom (a middling performer on the Golden Age index) could match Sweden’s employment rate for 55- to 69-year-olds, it could gain a long-term economic benefit of about £100 billion (US$145 billion) per year. That’s a GDP boost of more than 5 percent. For Southern European countries, the gains could be even higher as a share of GDP.

If the UK could match Sweden’s employment rate for 55- to 69-year-olds, its economic benefit would be about £100 billion per year.

Another high-ranking group of countries are Germany and its neighbors: Switzerland, Austria, and (to a lesser degree) the Netherlands. These three are particularly strong on the Young Workers index. They have long-standing traditions of high-quality technical and vocational education, often in the form of apprenticeships that combine practical and classroom training. In these countries, relatively few young people drop out of education and drift into youth unemployment; staying in school reduces the rate of crime, drug use, and other antisocial behavior. If all OECD countries could reduce the proportion of 20- to 24-year-old NEETs (“not in employment, education, or training”) to German levels, the world might gain US$1.2 trillion in gross domestic product. The U.K. alone could gain £55 billion (US$80 billion) (see Exhibit 2).

The German-speaking countries, however, have lower rankings on the Women in Work index. Their child-care systems tend to be less developed than those in Scandinavia. Thus, women with young children are more likely to take relatively long breaks from the workforce. Workers in these countries also tend to retire at a younger age than workers in Scandinavia. There is significant potential to improve in these areas, just as Sweden may have something to learn from Germany on how to reduce its youth unemployment rate.

Other top performers on the labor market indexes include New Zealand, particularly for older workers, and Canada, particularly for younger workers and women in general. New Zealand’s status as a remote island nation with a limited population may be a factor: This status presumably encourages more job flexibility and postponed retirements. Its younger people, lacking a full range of career opportunities, may migrate to other countries. Canada’s supportive public policy regime for working women probably contributes to its high scores. It outperforms the U.S. and the U.K., where a more market-led system leads to a labor market that is relatively flexible, but not one that functions as well for some groups, such as lower-skilled men and women with children.

Cultural attitudes about women are a consistent factor in country performance. For example, the two East Asian countries in our sample, Japan and South Korea, rank among the top seven countries for older workers, but in the bottom four for women. This reflects relatively patriarchal social and cultural norms. Japanese and South Korean women traditionally leave the labor force after having children, with a strong expectation that their husbands will be the main breadwinners in the family. Although this may be changing gradually, and many women do return to work when they are older, Japan and South Korea still stand out in this regard from the other countries in our study.

Eastern European countries such as Poland, Hungary, and the Slovak Republic (as well as the Czech Republic to a lesser degree) also stand together. They score in the lower half of the rankings on all indexes, but rank especially low for older workers and women. They still follow some of the practices developed during Soviet bloc times: extended maternity leave, relatively limited provision of child care, and lower average retirement ages.

Southern European countries such as Greece, Italy, and Spain (and to a lesser degree Portugal) also consistently appear near the bottom of our rankings. This may in part reflect the adverse cyclical effects of the Eurozone financial crisis since 2007, but it also reflects the cultures and practices of these countries. For example, these three nations have historically favored family care of children and featured a relative scarcity of formal child care, which reduces female participation in the labor force. Their labor market regulations make it difficult for young people to get jobs (at least in the formal economy). Generous state pension and disability benefit systems have also reduced incentives for older people in Southern Europe to work — at least until recently, when austerity measures have started to scale back these benefits. France and Belgium have similarly low rankings on the Golden Age and Young Worker indexes, but their state support for working mothers gives them higher scores for Women in Work.

Policy Implications

For government leaders, these findings suggest that a few key policy changes could improve labor market performance, and thus long-term prosperity. The actions below have especially high-leverage potential:

  • Improve the quality of vocational education and technical training for young people, as exemplified by Germany, Switzerland, and Austria
  • Remove labor market restrictions, such as those in Southern Europe and France, that make it hard for young people to get jobs
  • Increase state support for working parents, as exemplified by the regimes in Norway, Denmark, and Sweden
  • Shift the pension systems to encourage later retirement, as exemplified by Scandinavia, Japan, South Korea, the U.K., and the U.S.
  • Encourage broader cultural attitudes and social norms that strongly support working mothers and gender pay equality, following the Scandinavian example

Small tweaks can go a long way. For example, a gradual rise in the retirement age, some basic provision of child care, a loosening of employment restrictions, and intelligent development of apprenticeship and training programs for youth might in themselves be enough to tip the scales in an otherwise moribund economy and achieve faster growth.

Of course, it is not a quick or easy matter to shift public policy in these areas. Strong political coalitions may support labor market regulations that favor insiders over outsiders (for example, many mainland E.U. countries favor their own trade union members) and that protect state pensions and other benefits for older workers. It may take a crisis to create the political will to act. For example, the Eurozone economic crisis has led to reform in some Southern European countries such as Spain, just as past economic problems led to labor market reforms in the U.K. and the U.S. in the 1980s, Sweden in the 1990s, and Germany in the 2000s.

Skills, Age, and Gender in Business

The data contained in these indexes is also relevant for business leaders. If you are a senior executive in a business operating in a variety of countries, you need to be aware of how those countries’ labor market characteristics and associated legal and regulatory regimes vary. There may be tensions to manage between adopting a uniform global approach and a tailored local approach on issues like terms and conditions, training, gender pay equality, maternity leave, retirement age, company pension provision, and trade union participation in corporate governance.

Second, your location decisions may be influenced by labor market characteristics. In Germany, as compared to the United Kingdom, you may find more people with advanced technical skills — but fewer of them will be prepared to work flexible shifts for relatively low pay. These market attributes may change over time. For example, U.K. government initiatives established in 2015 are intended to move closer to the German model. They aim to create 3 million new apprenticeships for young people by 2020, funded by a new levy on larger companies.

Third, you will need to adjust your policies for aging populations in most OECD economies. People over 50 will constitute a greater part of your workforce, and many may wish to retire later than did earlier generations of workers. A number of employers have already begun to shift their approach. BMW in Germany and the Vita Needle Company (an industrial manufacturer) in the U.S. have designed factories that better suit the physical capabilities of older workers. The British-based home improvement retailer B&Q makes a point of employing older workers in its stores. Their personal experience with do-it-yourself projects provides a high level of knowledge and reassurance for customers. Home Depot and CVS Caremark have similar practices. In the U.S., the National Institutes of Health (NIH) seeks out older scientists and researchers because, as a May 2014 New York Times article on the aging workforce noted, “They often produce valuable research into their 60s and 70s.” In Japan, companies seeking out older employees include Daiwa House Industry Company, Trusco Nakayama Corporation, and Tokyu Livable Inc.

To follow their example, your HR department will need to downplay retirement plans that encourage early retirement, and make more training and retraining available to older workers. You will also have to combat implicit ageism in recruitment and progression policies, especially in sectors such as technology, where older employees tend to be undervalued.

Fourth, you will need to embrace gender equality more comprehensively through all aspects of your recruitment, reward, promotion, and role allocation processes. In advanced economies, on average, younger women are at least as well educated as men and often more so. But gender pay and progression gaps open up when workers are in their 30s and 40s, due to inadequate child-care and parental leave provisions, as well as to ingrained business norms. Scandinavian companies, like their governments, have led the world in this area, but progress remains slower elsewhere. Companies based in East Asia and Southern Europe are especially prone to lag behind in this regard.

Finally, you may have to reach out to the public sector in unprecedented ways to get the workforce practices you need. Governments and businesses need to work together on these issues if they are make the most of the economic potential of their people. Creative policymakers in both the public and private sectors will find many opportunities to design more flexible and more inclusive new workforce practices and guidelines. The long-term economic benefits from such efforts could be huge.

Author Profile:

  • John Hawksworth is chief economist of PwC in the United Kingdom. Based in London, he edits the PwC Economic Outlook and directs the firm’s macroeconomic research program.

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Demographics for Prosperity