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How to boost productivity of an aging population

LI JINGBO | 2020-09-30
(Chinese Social Sciences Today)

Projections for China’s age group structure by 2030 Photo: CSIS CHINA POWER PROJECT, UNITED NATIONS WORLD POPULATION PROSPECTS 
Quality and efficiency must be prioritized when pursuing high-quality growth, which requires us to abandon the extensive growth pattern that targets solely scale and speed. The key to shifting from a speed-based to an efficiency-based development strategy lies in improving labor productivity. 
Population is a fundamental factor that influences a country’s strategic socio-economic development in the long-term. It plays a key role in various parts of the society and economy. An aging population is a structural result of the demographic transition in China. As China strives to pursue high-quality growth with the backdrop of irreversibly aging demographics, the country must identify the potential impact of aging on economic development. 
 
Toward an aged society 
Population aging is a structural feature of a population transition partially brought by declining fertility and increasing longevity. According to conventional international standards, in around the year 2000, China entered an aging society with the following features. 
 
First, China has the largest aging population in the world. In 2019, there were about 176 million people aged 65 and above, more than that of any other country in the world. 
 
Second, although China’s aging rate is relatively low, it has soared from 7% to 12.6% from 2000 to 2019. According to the UN World Population Prospects, compared to France, Italy, Portugal and the US, it will take China a far shorter time to step across the threshold and qualify as an aged society, with an aging speed close to that of Japan. 
 
Affected by regional and rural-urban differences, aging rates in the rural areas are higher than those in the urban areas. In general, underdeveloped areas have seen higher aging rates than those of the developed areas, and the Western part of China have seen higher aging rates than those of the East. 
 
In general, China will remain an aging society, and is poised to move even further into an aged society. Throughout this process, the absolute amount of China’s labor productivity will stay relatively low with a relatively fast growth and a continuously decreasing regional gap. Based on the constant price in 2000, China’s overall labor productivity was 115,009 RMB per capita in 2019, which was far lower than those of developed economies. Meanwhile, between 2001 and 2019, the growth rate of China’s labor productivity stood between 6.2% and 13.6%, far higher than the global average. In 2019, the figure was 10.2, 3.4, 6.2, 12.4 and 5.2 times of that of Luxembourg, the US, Germany, France and Japan respectively. Judging from these statistics, the gap between China and developed economies in labor productivity has been decreasing gradually. 
 
The regional gaps among labor productivities in Eastern, Western and Central China have also been narrowing year by year, with increasing internal convergence. China’s labor productivity can potentially be boosted as the economic structure gradually improves and human capital steadily increases in an innovation-driven economy. 
 
Productivity encumbered by aging 
Population aging does not directly affect labor productivity. Instead, it impacts productivity indirectly through intermediate links in economic development. 
 
Labor productivity measures the output level of the unit labor. When the rate of aging is still relatively low, the age structure will bring down the growth rate of a country’s population. As the population ages even more, the labor force will increasingly become a scarce resource for production. In this case, investments in education and training will increase labor productivity. Along with a shrinking labor force is a constantly decreasing rate of return on material capital and increasing rate of return on human capital. The reduction in labor supply increases the marginal productivity of labor. 
 
In the initial phase of population aging, the spill-over effect of human capital counteracts the potential negative productivity that may be caused by population aging. When compared to young labor, mature labor is rich in experience and expertise. Maintaining a certain proportion of mature labor helps to stimulate productivity. At this stage, labor productivity may continue to increase when working-age populations decrease. 
 
As society evolves, the population will age even more, and the birth rate will stabilize and gradually go downwards. At the phase of “low growth rate and fast deceleration,” working-age populations will shrink and the workforce will age, and their decrease will hamper economic growth. In addition, human capital will degenerate due to shrinking and depreciated skills caused by population aging. 
 
The technological innovation and innovative development of modern production gradually abandon labor-intensive skills will gradually abandon labor-intensive skills, leading to a devaluation of technical skills. The drastic change in the labor market will damage the aging labor force, causing human capital in senior populations to depreciate and then hinder economic growth. When that day comes, population aging will exert a negative effect on labor productivity. 
 
Solution: technical advances 
We need to start counteracting the impacts of population aging on labor productivity by leveraging technical advances, improving pure technical efficiency and scaling efficiency. The imbalance between population aging and labor productivity needs to be addressed with the aid of innovation and technologies. 
 
First, technical advances help to boost production efficiency. Although the traditional demographic dividend is fading, China is still equipped with a giant labor force, which allows it to tap into a potential demographic dividend as a populated country. Meanwhile, the enormous improvement of Chinese people’s overall quality of life has paved the way for China to acquire a quality-based demographic dividend. The enhancement of people’s comprehensive quality has made it possible to channel the labor force from labor-intensive to technology-intensive industries. In the case of fixed amount of production resources, technological progress can improve labor productivity. Amid the inevitable trend of population aging, investments in education and industrial structural transformation can fully utilize technological advances to stimulate production. 
 
Second, we must improve pure technical efficiency, accelerate technological updates and ensure effective technological advances throughout the productive process. Although China leads the world in the amount of patent applications, it has a relatively low patent exploitation rate. A total of over 1.4 million invention patents were filed in China in 2019, with 55.4% of them implemented and 38.6% commercialized. The average term of patent maintenance is distinctively shorter in China, with only 4.8% of all valid invention patents lasting for more than 10 years, compared to the global average of 24.7% of patents. 
 
Patents can be turned into effective production factors that fuel productivity only when they are applied to actual production processes. However, since technology advancement remains ineffective in China, population aging has affected labor productivity by inhibiting the transmission mechanism for pure technical efficiency. This requires more attention. 
 
Last, we need to leverage economies of scale to raise labor productivity. Given fixed production technologies, economies of scale generated with an increased factor input will significantly reduce the average total cost, increase the gross output and generate scalable effects. Scale efficiency targets not the extensive growth of production scale, but an optimized economic efficiency to ultimately achieve Pareto optimality. 
 
In the context of an increasingly aging society, market regulation and policy orientation have prioritized technological innovation so as to reverse the unsustainability and inefficiency associated with extensive economic growth, and gradually implement an innovation-driven development. Given the same levels for technology, funds and human capital, economies of scale can offset part of production costs and increase units of output per labor hour. 
 
Although China’s capital input has made a major contribution to the country’s economic development, labor productivity remains a long-term driver for a high-quality growth. Ultimately, it is labor productivity that determines where an economy is heading. The aging population and imbalanced age composition of a labor force not only directly drags the production efficiency downward, but also impacts labor productivity indirectly. It is important to accurately grasp the impact of population aging on labor productivity. To achieve sustainable economic growth, China needs to work out how to improve labor productivity as its population ages. 
 
Li Jingbo is a postdoctoral fellow from the Center for Population and Development Studies at Renmin University of China. 
 
Edited by WENG RONG