N°37 MARCH 2017
ECONOTE
Societe Generale
Economic and sectoral studies department
“SUPER-AGED” NATIONS AND INFLATION: CASE STUDIES

With more than 20% of its citizens aged 65 or older, Japan became
the first “super-aged” country in 2006, according to a definition used by the
United Nations. A few years later, Germany and Italy joined the super-aged
club. This paper aims at examining the link between population aging and
price dynamics by reviewing the experience of the world’s three super-aged
countries. All three countries have, in recent decades, experienced
historically low inflation or deflation.

Recent academic work, however, suggests that fast-aging countries
should confront rising inflation pressures. In this note, we probe the two main
arguments made by those who argue that population aging should cause
inflation, that is, that a declining labor force should increase workers’
negotiating power and, hence, cause wage-push inflation, and that
population aging should lead to a fall in private saving (that is, a rise in
private spending), and, thus, generate demand-pull inflation.

We show that, so far, there has been no sign of a wage-price spiral in
any of the three super-aged countries. Since the early 1990s or mid-1990s,
when their working-age population started to shrink, these countries have
exhibited either modest or negative wage growth, suggesting a decline,
rather than an increase, in workers’ bargaining power over that period. As
demographics are only one of many influences on labor’s negotiating power,
their impact may have been offset by other forces such as globalization.

We also find that the household saving rate has collapsed in Japan
and Italy but has remained approximately constant in Germany. What is
more, the corporate saving rate has risen to very high levels in Japan and (to
a lesser extent) Germany, while investment has weakened substantially. This
has led to a seemingly structural surplus of private saving over private
investment, which has acted as a drag on aggregate demand, reducing
growth and inflation.
Marie-Hélène DUPRAT
+33 1 42 14 16 04
[email protected]
ECONOTE | N°37 – MARCH 2017
With more than 20 percent of its population aged 65 or
older, Japan became the first “super-aged” country in
2006, according to a definition used by the United
Nations1. A few years later, Germany and Italy joined
the super-aged club, which is set to expand drastically
in the years ahead. By 2020, the world will have 13
super-aged countries, mostly in Europe, and by 2030,
the number of super-aged countries in the world will
reach 34, including Hong Kong, Korea, the US and the
UK. To put the case of Japan, Germany and Italy into
perspective, we look at the United States, which is
demographically more fortunate, with “only” 15 percent
of its citizens aged 65 or above (which puts the US into
the United Nations’ “aged” category), thanks largely to
immigrants, who tend to be of working age and have
more children than native-born women.
Gr1. POPULATION AGED 65 AND ABOVE
(in percent of total population)
30
25
20
Japan
15
Italy
Germany
10
USA
5
0
1950
1960
1970
1980
1990
2000
2010
Source: UNDP.
This study aims to probe and offer insights into the
question as to whether population aging is inflationary,
as claimed by a number of authors [see notably
Goodhart, Pradhan and Pardeshi (2015) and Juselius
and Takats (2015)2]. To that end, we review the
experience of the world’s three “super-aged” countries,
namely, Japan, Italy and Germany, which have faced
the fastest demographic changes and thus could be
seen as global precursors to what lies ahead for most of
the advanced world. This note is a follow up to our
previous note on the potential relationship between
1
When populations have more than 20% elderly at age 65 and
above, the United Nations (UN) defines them as “super-aged”.
“Aged” and “aging” populations have respectively more than 14%
and 7% elderly. Japan – the epitome of the rapidly aging society in
the world - became an “aging society” in 1970, which was 43
years later than Italy in 1927, and became an “aged society” in
1994 following Germany in 1972 and Italy in 1988. Japan,
however, rushed into a “super-aged society” in 2006, the earliest
in the world. While it took only 36 years for Japan to move from
“aging society” to “super-aged society”, Germany spent 40 years
moving from “aging society” to “aged society,” and another 40
years from “aged society” to “super-aged society”.
2
Goodhart, Charles, Manoj Pradhan and Pratyancha Pardeshi
(2015), “Could Demographics Reverse Three Multi-Decade
Trends?”, Global Issues, Morgan Stanley, September 15; Mikael
Juselius and Elod Takats (2015), “Can demography affect inflation
and monetary policy?”, BIS Working Papers, N°485, February.
aging and inflation3. All three countries have, in recent
decades, experienced historically low inflation or
deflation. In this note, we do not dwell on these
countries’ experience with inflation, which is well known,
but rather focus on the two main arguments made by
those who expect that population aging should cause
faster inflation, that is, that a declining labor force
should increase workers’ negotiating power and, hence,
cause wage-push inflation, and that population aging
should lead to a fall in private saving (that is, a rise in
private spending) as a result of life-cycle effects, and
thus, generate demand-pull inflation.
In the first part of this paper, we show that, so far, there
has been no sign of a wage-price spiral in any of the
three super-aged countries. Since the early 1990s or
mid-1990s, when the working-age population started to
shrink in all three super-aged countries, the trend in
wage growth in the three super-aged countries has
been either modest or negative, suggesting a decline,
rather than an increase, in workers’ bargaining power
over that period. In the second part of this note, we find
that, in Japan and Italy, the collapse of household
savings rates over the past two decades fits theoretical
predictions well, but in Germany the household savings
rate has remained approximately constant over that
period, which does not match the prediction of the lifecycle theory of savings. Yet a seemingly structural
surplus of savings over investment has emerged in the
corporate sectors of Japan and Germany, which has
contributed to an excess supply of aggregate (national)
saving which has acted as a drag on aggregate
demand, reducing growth and inflation.
POPULATION AGING AND THE
BARGAINING POWER OF LABOR
FALL IN THE WORKING-AGE POPULATION
Japan and Germany have long passed the “tipping
point” when the working age population (typically
defined as those aged 15-64) peaked and started to fall.
In Japan, the size of the working-age population started
contracting back in 1996, and that in Germany began to
shrink in 1998. In Italy—Europe’s most rapidly aging
society—, large immigration inflows since the second
half of the 1990s have prevented the shrinking of the
country’s working-age population, but the share of
working-age persons in the total population has shown
a marked fall since the mid-1990s. In the USA, the size
of the working-age population has kept growing (and
should grow 10% by 2050), and only started to shrink
as a share of total population in the early 2010s. In
most high-income countries, the working-age share of
the population is now in decline.
3
See Duprat, Marie-Hélène (2016), “Population Aging: Risk of
Deflation or Inflation?”, EcoNote n°35, Société Générale,
November.
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ECONOTE | N°37 – MARCH 2017
Gr2. WORKING AGE POPULATION (15-64)
(In percent of total population)
72
70
68
66
Japan
64
Germany
62
notably hotels, restaurants and elderly care. These
sectors top the list for lowest productivity per worker,
which crimps workers’ capacity to negotiate better
wages. As for Italy, not only has this country not so far
developed any major labor shortages, but the problem
in its labor markets is actually quite the opposite: high
unemployment.
Italy
60
USA
58
56
54
1950
1960
1970
1980
1990
2000
2010
Source: UNDP.
For Goodhart et al.4, global aging is set to start an era
of tight labor markets which should pave the way for an
increase in the bargaining power of labor, leading to
higher real wages and, thus, to cost-push inflation.
As a matter of fact, German employers have in recent
years increasingly struggled to fill vacancies. Against a
backdrop of record low unemployment (3.8% in January
2017), Germany has been facing a growing shortage of
workers, especially skilled labor (such as engineers and
IT specialists, and health specialists), which is already
inhibiting growth in many regions5. Policymakers and
researchers are still debating whether these labor
shortages are due to genuine labor supply shortages, or
to skill mismatches6. According to the Federal
Employment Agency (FEA), there is no general labor
shortage (at least so far) in Germany, although certain
specific occupations are experiencing an acute labor
shortage. Likewise, many Japanese industries are
suffering from severe labor shortages, which have put a
brake on their growth. Shortages are particularly severe
amongst security guards, and in the service sector,
4
Op.cit.
5
There are widespread complaints from German employers about
a shortage of qualified staff. The shortage is most acute for skilled
manual labor. Part of the problem comes from students’ growing
preference for academic qualifications, the correlative devaluation
of professional training, and the high drop-out rates at universities
(one in three university bachelor-degree students drop out before
graduating).
6
Up to now, there is no clear methodology in Germany
determining whether there is a skilled labor shortage or not.
So far, wage developments have not given credence to
the Goodhart et al. claim. Two decades after the share
of their population in the 15-64 age bracket peaked and
started to fall, nominal wage growth in Germany, Japan
and Italy has remained subdued. In Germany, nominal
wages have risen appreciably since 2010, but this has
come after a long period of wage restraint, especially at
the lower end of the wage distribution. In 2015, the pay
of German employees with below-average wages was
boosted by the introduction of a legal minimum wage of
€8.50 ($9.40) per hour. However, the shortages in the
German labor market have not, at this point at least, left
their imprint in strong upward wage pressure. So far,
the impact of (limited) German wage increases on core
inflation has remained muted.
In recent decades, the trend in real wage growth in the
three super-aged countries has been either modest or
negative and consistently lower than it was when these
countries were younger. Noticeably, the United States
has, since the mid-1990s, and despite its rising
working-age population, exhibited much better wage
performance on average than any of the three superaged countries. In Germany, after a long period of near
stagnation and even decline between 2004 and 2008,
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ECONOTE | N°37 – MARCH 2017
real wages have increased reasonably fast since 2014,
mainly reflecting falling inflation and the stepwise
introduction of statutory minimum wages.
growth in a majority of advanced economies, including
the United States, Germany, Italy and Japan, attesting
to the general decline of workers’ bargaining power.
Over the past two decades, the labor share of national
income has been on a downward trend in all four
countries, with the United States showing a better
performance on average than the super-aged club7.
The general downward trend in the labor share
reversed during the depths of the global financial crisis,
in the second half of 2008, reflecting the fact that wages
are less volatile than profits in an economic downturn,
then, resumed its downward path after 2009. In recent
years, however, the labor income share has shown
signs of a rebound, perhaps an early sign of the
resurgence of labor bargaining power on the back of the
improving situation on the labor market. But workers
have not, at this point at least, regained the power they
lost over the last three decades in any of the four
countries.
HOW MUCH BARGAINING POWER DO WORKERS
HAVE?
So far, the experience of the world’s super-aged
countries suggests that the implications for the
bargaining power of labor of large retiring cohorts and
of smaller entering cohorts is less direct than is
suggested by Goodhart et al.’s hypothesis. This is
because there is a lot more to the bargaining power of
labor than the share of working-age people relative to
the total population. While demographic forces are
affecting workers’ bargaining power, other forces are
also at play which may offset the impact of
demographics. Key forces include:
-
-
Trends in labor share are, to a large extent, driven by
the interplay of wage dynamics and productivity. If
average wages increase more rapidly than average
labor productivity, the labor share tends to increase.
Conversely, when average wages increase less rapidly
than average labor productivity the labor share
declines. Over the past two to three decades, average
wage growth has tended to lag behind productivity
77
See, for example, OECD (2015), “The Labour Share in G20
Economies”, Report prepared for the G20 Employment Working
Group Antalya, Turkey, 26-27 February.
The continuing loss in union power (see, for
example, Bentolila and Saint-Paul, 20038)9
which has led to a growing inability of unions to
secure wage rates according to productivity
growth. Against the backdrop of a declining
trend in productivity growth in many advanced
countries, weaker labor unions have allowed
for the downward adjustment of real wages that
eventually contributed to the fall in the labor
income share.
Labor-substituting technological changes. The
fast fall in the prices of computer equipment
associated with the information technology (IT)
revolution has boosted capital’s return,
inducing firms to shift away from labor and
toward capital, contributing to the decline in
8
Bentolila, S. and G. Saint-Paul (2003), “Explaining Movements in
the Labor Share”, Contributions to Macroeconomics, Vol. 3, N°1,
Article 9.
9
The long-term decline in union membership in many advanced
countries is underpinned by a number of factors which typically
include shifts in the demographic, industrial and occupational
composition of the labor force away from traditionally heavily
unionized types of workers and sectors, an anti-union
management offensive in the private sector, insufficient support
from the law, and/or a value system which exalts individualism and
competition.
4
ECONOTE | N°37 – MARCH 2017
-
-
-
labor’s share of total income. Moreover,
capital-augmenting technological progress has
produced “skill-biased technological changes”
that have decreased demand and pushed
down wages for less educated workers/skilled
jobs, making it harder for uneducated workers
to command high wages10.
Globalization has worked as a wagemoderating factor, owing to the intensification
of competition stemming from the entry of
labor-abundant countries, notably China.
Globalization gives domestic firms access to
labor
overseas
through
off-shoring,
subcontracting or access to immigrant (foreignborn) workers. Importantly, global competition
makes it difficult to sustain high wages in
manufacturing or other industries under
outsourcing pressure, even without actual
changes in production locations, due to the socalled “threat effect”.
Changing firms’ structure in response to
financial market pressure to maximize
shareholder value – that is, return on assets.
Market pressure encourages firms to pursue
industrial organization strategies that focus on
core activities, often inducing them to
subcontract labor-intensive activities.
Labor
market
institutions,
employment
protection laws and the extent of the welfare
state. For example, welfare benefits (social
security benefits, unemployment benefits, etc.)
can be a source of wage restraint if they serve
as a form of social wages, thereby affecting the
options of employees during the bargaining
process.
Workers' fortunes in the super-aged countries have not
yet turned around despite two decades of shrinking
working-age populations, suggesting that the impact of
demographics on labor bargaining power has not been
enough to offset the pressures coming, in particular,
from globalization and technological advances. Will
demographics rather than technology or globalization
be the driving force behind aging countries’ wage
growth in the world of the future? This question is still
open to debate. On the one hand, the decline of the
global labor force - as most countries including China
are aging - should limit the role of globalization but, on
the other hand, technology, including increasingly
sophisticated robots, is bound to continue to shape the
10
See notably Feenstra, R.C. (2004), Advanced international
trade, theory and evidence, Princeton University Press, Princeton
and Oxford. Feenstra, R.C. (2007), ‘Globalization and its impact
on labor’, Global Economy Lecture, Vienna Institute for
International
Economic
Studies,
available
at
http://www.econ.ucdavis.edu/faculty/fzfeens/pdf/globaliz
ation.pdf.
future of workers’ compensation and employment in the
years/decades ahead.
Technology has for decades replaced many jobs in
multiple industries, and this trend is set to continue in
the decades ahead. Boston Consulting Group forecasts
that the proportion of tasks handled by robots will rise
from 8% today to 26% by the end of the decade, driven
by China, Germany, Japan, South Korea and the US,
which together will account for the bulk of robot
purchases. Technology, including robotics, will continue
to advance in the years/decades ahead, which will
probably render runaway wage increases unlikely, even
as the labor market tightens. High-skilled workers (i.e.
those holding academic degrees), however, will be at a
premium, which may presage faster wage growth in
high-skill occupations.
POPULATION AGING AND SAVING
THE LIFE-CYCLE THEORY OF SAVING
The life-cycle theory of saving predicts that countries
undergoing aging should eventually expect a fall in
aggregate savings as an increasingly large share of
households move through into retirement and begin to
dissave11. This theory argues that individuals smooth
consumption over their lifetimes given expected lifetime
resources. Young households tend to have
consumption needs that exceed their income, so they
have little savings and borrow in advance of higher
earnings. In middle age, working households’ earnings
generally rise, enabling debts accumulated earlier in life
to be paid off and savings to be accumulated, notably
for retirement provision considerations. Savings reach a
lifetime peak when workers are at the middle and near
11
See Modigliani, Franco and Richard Brumberg (1954), “Utility
Analysis and the Consumption Function: An interpretation of
Cross-section Data”, In Post-Keynesian Economics, ed. Kenneth
K. Kurihara, 388-436. New Brunswick, N.J.: Rutgers University
Press. Also see Modigliani, F. and Ando, A. (1957), “Test of the
Life-cycle Hypothesis of Savings”, Bulletin of the Oxford University
Institute of Economics and Statistics 19, pp.99-124. See Franco
Modigliani (1970), “The Life-Cycle Hypothesis and Inter-country
Differences in the Saving Ratio”, pp. 197-225 in W. A. Eltis, M.
FG. Scott, and J. N. Wolfe, eds., “Induction, Growth, and Trade:
Essays in Honor of Sir Roy Harrod”, (Oxford University Press).
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ECONOTE | N°37 – MARCH 2017
the end of their careers. Finally, in retirement,
household incomes decline and people begin to dissave
to live off accumulated assets. So, according to the lifecycle theory, the oldest countries should have low
savings rates (decline in wealth because of pensioners’
consumption). Yet, of course, the household saving
ratio during the earning period of the life cycle is also
strongly affected by the life expectancy and the
retirement age. As adult survival increases and
uncertainty surrounding future pension payments rises,
saving motives for retirement become stronger, which
may lead to an increase in savings that could offset the
effect of having more consumers than savers.
Gr10. POPULATION IN THE HIGH-SAVING GROUP (45-64)
(In percent of total population)
35
30
25
Japan
20
Italy
15
Germany
USA
10
5
Source: UNDP.
As in Japan, the household savings rate has tumbled in
Italy as the share of the population in the low-saving
age group beyond 65 has risen. Yet, this has occurred
despite a still rising share of the Italian population in the
high-saving years from 45 to 64. By contrast, in
Germany, the household saving rate has remained
approximately constant over the past two decades even
though the share of persons aged 65 and above has
risen appreciably. However, the increase in the share of
Germany’s population in the high-saving years
(currently at a historical high of 30.8%) must have
buttressed the country’s household saving rate.
In view of the above described life-cycle path of saving,
the aggregate saving rate should be expected to
depend in large part on the relative size of the different
age groups in the population. Holding everything else
constant, a growing share of the population in the lowsaving years from 65 and over should lead to a
downward trend in the household saving rate.
Conversely, when a country has a large fraction of its
population in the high-saving years from 45 to 64, a
high share of household income should be saved.
DIVERGENT HOUSEHOLD SAVING PATTERNS
In Japan, the share of the population in the high-saving
age group from 45 to 64 rose strongly to a peak of
28.3% in 2000, before starting to decline substantially to
reach 25.7% in 2015. In 2015, the share of the
population in the high-saving years was 5.1 percentage
points lower than in Germany, 3.3 percentage points
lower than in Italy, and 0.6 percentage points lower than
in the United States. These demographic ratios
theoretically imply an appreciably lower ratio of
personal saving in Japan than in Germany and Italy,
which we in fact observe. The rapid decline in the share
of the high-saving age group in Japan since 2000
combined with the soaring fraction of its population in
the low-saving years beyond 65 must account for a
significant part of the fall in the Japanese household
saving rate since the 1990s. As Japan has aged, its
household savings rate has collapsed, as per the
prediction of the life-cycle theory of saving.
All in all, in the cases of Japan and Italy, the prediction
of the life-cycle theory of saving seems to have held
pretty well. However, in Germany, where fluctuations in
the household savings ratio have been relatively
modest since the early 1990s, the theoretical and
observed patterns do not appear to match. It therefore
seems necessary to introduce additional saving motives
to satisfactorily explain the German household saving
behavior observed. One reason why the elderly may not
dissave as much as the life-cycle theory predicts they
should is because of a desire for inter-generational
transmission of wealth (bequest motive). Another
reason is that people may recognize that more funds
need to be devoted to private retirement provision given
increased life expectancy – and thus longer anticipated
periods of retirement – and the greater uncertainty
surrounding the pension system, which may prompt
them to stay in the labor market longer and thus
ultimately to save more during their (longer) working
lives.
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ECONOTE | N°37 – MARCH 2017
More generally, a desire to build or maintain
precautionary savings to deal with possible adverse
income or health events may affect the life-cycle
savings pattern of households. And, of course, people
may save for non-demographic reasons. There are
many factors other than demographics that can affect
household saving behavior. These notably include the
extent of income inequality (and/or the share of income
going to the wealthy), the ability to borrow (especially
against housing), the level of direct taxation, and the
extent of coverage by pension, medical insurance and
social security systems. For example, reducing the
generosity of the pension promise will tend to increase
the need to save in preparation for retirement.
what is often missing in the life cycle argument is a
discussion about the impact of demographic factors on
investment, a huge proportion of which is generated by
firms.
HIGHER CORPORATE SAVINGS
The current account balance can be split into net
savings (i.e. excess savings over investment) in the
household, corporate and public sectors. And what is
striking is the rise in the corporate savings rate in the
three super-aged countries. In Japan, the corporate
savings rate has soared to levels never reached before
in developed countries.
GLUT OF SAVINGS OVER INVESTMENT
But households are only one sector of a country’s
economy which also includes businesses and the
government. At the national level, the correspondence
between observed saving changes and the pattern of
saving and dissaving described by the life-cycle
hypothesis is not clear. Today, all three super-aged
countries are net lenders to the rest of the world
(meaning that their national savings exceed their
domestic investment) while the United States is a net
borrower from the rest of the world. Since 2000,
Germany’s current account balance (net lending to the
rest of the world) as a share of its annual output has
surged, reaching a record level of 9.2% of GDP last
year (the largest current account surplus in the world).
A surplus of that magnitude is unusual both from an
international perspective and for Germany which has
traditionally been a surplus country with the exception
of the 1990s. In Japan the current account balance has
remained in sizeable surplus since the 1980s, while in
Italy the current account moved into balance in 2013
and has since then shown a rising surplus.
This pattern of current account balances is seemingly
not (yet) consistent with the life cycle theory of savings
according to which countries with an old population are
more likely to run current account deficits given that oldage households are likely to be dissavers12. However,
12
This is because national account identities state that the current
account balance is equal to the excess of national savings over
The household sector in Germany continues to have
the highest savings gap as private households have cut
back on their investments while maintaining an almost
constant savings rate overall. But a substantial part of
the increase in German net saving in recent years has
been driven by the non-financial corporate sector. The
corporate sector became a net lender to the rest of the
economy before the global financial crisis. And since
then, its net savings — net profits minus dividends —
have accelerated. In recent years, the government has
reduced its deficits and thus also contributed to the
increase in the current account balance.
domestic investment or the excess of output over domestic
absorption. According to the life cycle theory of savings, countries
with a relatively young or old population are more likely to
consume more than they produce, resulting in a current account
deficit, while countries with a relatively large number of middleaged people, which are the prime net savers of societies, are
more likely to run a current account surplus.
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ECONOTE | N°37 – MARCH 2017
In Japan, the current account has remained in surplus
because shrinking household saving has been offset by
a tremendous increase in corporate saving. Japanese
non-financial firms responded to the excesses that built
up during the asset price bubble period by rapidly
switching from large net borrowers to big net savers.
Since the early 2000s, the unusually large financial
surplus of the corporate sector (which reached a
stunning 8.9% of GDP in 2010) has been the
counterpart of nearly the entire current account surplus.
The enormous public sector deficit - which counts as
negative saving – has partially offset the huge excess
corporate savings.
In Italy, corporations switched from net borrowing to
material net lending positions in 2012. Government dissaving has declined in recent years, owing to budget
consolidation, while the household saving balance has
risen from the historic lows reached in the early 2010s.
Typically, one would expect the corporate sector to
borrow from the household sector to finance capital
investment - thereby boosting both aggregate demand
and productive capacity, and thus, aggregate supply.
However, in all three super-aged countries, the
corporate sector has, weirdly, become a net financer of
the economy. Since the early 1990s, the corporate
financial surplus has risen to very high levels in Japan
and, to a lesser extent, Germany, reflecting a
combination of weakening corporate investment and
increasing corporate saving shares, possibly related to
the uptrend in the share of national income going to
corporations on the back of the general wage
moderation trend.
FEEBLE INVESTMENT
Over the last couple of decades, corporate investment
has been lower than expected/desired in most
developed countries. That reflects, in part, the legacy of
the global financial crisis, but it could also be indicative
of a long-term or structural change as trend investment
growth had been slowing before the crisis. There are a
number of possible reasons for the sluggish capital
investment growth of recent decades, and population
aging figures prominently among them13.
The aging population may deter investment for at least
two reasons. First, an aging or declining population
tends to lead to multifarious demand-side effects
13
Another reason for weakening investment is the availability of
cheaper capital goods due to technological innovation. Much
investment today is in computers, communications equipment,
and software (usually referred to as IT investment), whose prices
have fallen much more quickly than the prices of other goods,
meaning that constant real investment is financed by lower
nominal investment. It may be that today’s innovation is simply
less investment-intensive than it was in the manufacturing age.
But beyond demographics and technological change, high levels
of debt count as a key factor behind the lack of investment. After
the accumulation of vast debts in the years leading up to the 2008
financial crisis, much of the advanced world has been forced to
begin a broad deleveraging cycle. With balance sheet repair
having become the key priority for highly indebted agents, entire
sectors of the economy have sought to save more and invest less.
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ECONOTE | N°37 – MARCH 2017
including changing consumption preferences14. Older
people tend to spend less on items that require heavy
investment, such as houses, and more on services,
including medical care and tourism. Moreover, a slowgrowing or shrinking labor force reduces a country’s
capacity to grow, which tends to raise concerns about a
future slowing of earnings that has the potential to
prompt forward-looking households to consume less
and save more today15. And less household
consumption means less business sales and ultimately
less capital spending. This can create an incentive for
residents to invest abroad in order to take advantage of
cheaper labor and stronger growth prospects
elsewhere, and earn a higher return than the one that is
available in the domestic economy16.
Second, firms need a given capital stock (equipment,
buildings and land) per worker. So if population growth
slows, the demand for new houses, new office buildings
and new capital goods to equip new workers falls. Slow
or negative growth in the labor force means low
demand for new investments, which was the point
raised by Alvin Hansen in the late 1930s. Hansen
argued that the decline in the birth rate in the United
States was a major cause of the shortfall in investment
and hence of the lack of aggregate demand which
characterized the Great Depression17. Slowing
population growth, he emphasized, implies an enduring
decline in investment demand, which can create a
chronic oversupply of savings that can push the
economy into a semi-permanent slump (that is, “secular
stagnation” as Hansen put it in his 1938 American
Economic Association presidential address). Some
authors, such as Larry Summers18 and Paul Krugman,
have identified demographic aging as one of the main
causes of the protracted period of low growth that
advanced countries have been facing in the last
decade.
A pessimistic reading of demographic aging has been
given credence by the recent history of Japan: the
Japanese economy entered into economic stagnation
precisely at the moment when its labor force began to
decline, and it has since fallen into deflation. It is quite
meaningful that, over the last three decades, except
briefly in the late 1980s-early 1990s, Japan has
exhibited a large surplus of private saving (sum of
corporate and household saving) over private
investment (sum of corporate and household
investment).
14
See, for example, Yoon, J. W., Kim, J., and J. Lee (2014),
“Impact of Demographic Changes on Inflation and the
Macroeconomy”, IMF Working Paper WP/14/210.
15
Also see Masaaki Shirakawa (2012), “Demographic Changes
and Macroeconomic Performance – Japanese Experiences”,
Opening remarks by Mr. Masaaki Shirakawa at the 2012 BOJIMES Conference, hosted by the Institute for Monetary and
Economic Studies, at the Bank of Japan, Tokyo, 30 May.
16
In Japan, notably, overseas investment grew at a rate of 7% in
the mid-1990s and 12% in the mid-2000s before the onset of the
global financial crisis, as Japanese firms expanded abroad to
exploit cheaper labor and rising demand in host countries. The
pace of Japanese investment in overseas markets has
accelerated since the global crisis so that today overseas
investment accounts for about 25% of total manufacturing
investment.
more rapid advance of technology than in the past if we are to find
private investment opportunities adequate to maintain full
employment… It is my growing conviction that the combined effect
of the decline in population growth, together with the failure of any
really important innovations of a magnitude sufficient to absorb
large capital outlays, weighs very heavily as an explanation for the
failure of the recent recovery to reach full employment.”
18
17
See Hansen, Alvin (1939), "Economic progress and declining
population growth", American Economic Review, 29(1): 1-15.
Hansen set out his point as follows: “We must fall back upon a
See Summers, Lawrence H. (2014), "Reflections on the new
secular stagnation hypothesis”, Secular stagnation: Facts, causes
and cures, pages 27-40.
9
ECONOTE | N°37 – MARCH 2017
In 2010, Japan’s surplus of private saving over
investment accounted for an amazing 12.4% of GDP;
the excess surplus of private saving has, since then,
declined somewhat, but is still a very large portion of
GDP (7.5% in 2015). Likewise, a seemingly structural
surplus of private saving over investment has emerged
in Germany, amounting to 6.7% of GDP in 2015. The
prevalence of chronic excess savings over investment
has, of course, far-reaching implications not only for the
growth of potential supply (since it reflects feeble
investment), but also for the strength of aggregate
demand.
All in all, the experience (so far at least) of the three
super-aged countries does not appear to support the
argument that there is a positive relationship between
an aging population and inflation. If anything, countries
experiencing more rapid aging have, in recent decades,
exhibited lower inflation. Japan’s, Germany’s and Italy’s
populations have so far aged in a context in which
demographic trends around the world have not been
synchronized. What will happen when the balance shifts
toward an aged or super-aged society not just at the
national level, but also at the global level, as the
demographic
transition
continues
to
advance
worldwide? Providing a clear-cut answer to that
question is a complex exercise as there are several
forces at play and potentially countervailing effects.
Admittedly, if demographic aging effectively leads to an
increasing propensity to save and/or a decreasing
propensity to invest, or to a fall in the rate of investment
that is greater than the fall in the rate of saving, then, an
economic condition of persistent excess of desired
savings over desired investment such as that described
by the secular stagnation hypothesis can undoubtedly
arise. And, as Hansen pointed out, the excess supply of
savings generates chronically deficient aggregate
demand, which reduces growth and inflation.
10
ECONOTE | N°37 – MARCH 2017
PREVIOUS ISSUES ECONOTE
N°36 Housing in Europe: Are there any overheated markets?
Emmanuel Perray (December 2016)
N°35 Population aging: Risk of deflation or inflation?
Marie-Hélène DUPRAT (November 2016)
N°34 Emerging markets’ external debt: It’s the same old song?
Juan Carlos DIAZ MENDOZA (November 2016)
N°33 US public debt: Towards more domestic and private financing
Amine TAZI, Clémentine GALLÈS (September 2016)
N°32 China: Assessing the global impact of a Chinese slowdown
Sopanha SA, Théodore RENAULT (July 2016)
N°31 France: A private sector in better financial health, despite higher debt
François LETONDU (June 2016)
N°30 A world without inflation
Marie-Hélène DUPRAT (March 2016)
N°29 Low interest rates: the ‘new normal’?
Marie-Hélène DUPRAT (September 2015)
N°28 Euro zone: in the ‘grip of secular stagnation’?
Marie-Hélène DUPRAT (March 2015)
N°27 Emerging oil producing countries: Which are the most vulnerable to the decline in oil prices?
Régis GALLAND (February 2015)
N°26 Germany: Not a “bazaar” but a factory!
Benoît HEITZ (January 2015)
N°25 Eurozone: is the crisis over?
Marie-Hélène DUPRAT (September 2014)
N°24 Eurozone: corporate financing via market: an uneven development within the eurozone
Clémentine GALLÈS, Antoine VALLAS (May 2014)
N°23 Ireland: The aid plan is ending - Now what?
Benoît HEITZ (January 2014)
N°22 The euro zone: Falling into a liquidity trap?
Marie-Hélène DUPRAT (November 2013)
N°21 Rising public debt in Japan: how far is too far?
Audrey GASTEUIL (November 2013)
N°20 Netherlands: at the periphery of core countries
Benoît HEITZ (September 2013)
N°19 US: Becoming a LNG exporter
Marc-Antoine COLLARD (June 2013)
N°18 France: Why has the current account balance deteriorated for more than 20 years?
Benoît HEITZ (June 2013)
N°17 US energy independence
Marc-Antoine COLLARD (May 2013)
N°16 Developed countries: who holds public debt?
Audrey GASTEUIL-ROUGIER (April 2013)
N°15 China: The growth debate
Olivier DE BOYSSON, Sopanha SA (April 2013)
11
ECONOTE | N°37 – MARCH 2017
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