EF303: Irish Economic Analysis Demographics

Recap from last week Looked at: –SR prospects for the economy - not good! –Medium-term outlook… –ESRI suggest a positive outlook, based on potential productivity growth and potential labour force growth

Recap from last week Productivity growth: –Shift away from emphasis on construction –Dividends from investment in human k –Specific high-productivity sectors… etc. Constraints to growth: –Risks to public finances –Infrastructural constraints –Loss of competitiveness? –Ability to continue to attract investment and skilled workers…

Today The role of demographics –Look at Ireland’s demographic profile –Also at projections for Ireland’s population –Why do demographics matter? Resources: –CSO Census 2006 –CSO Population and Labour Force projections –ESRI Medium Term Review –Bloom and Canning “Contraception and the Celtic Tiger”, The Economic and Social Review, Vol.34, No.3, Winter, 2003, pp –OECD paper on macroeconomic impacts of demographic change

Ireland’s population since 1926

Ireland’s demographic profile: 2006 Census Population on Census night, (23 April 2006) was 4,239,848 An 8.2% increase on 2002 Annual growth of about 2%… at this rate population would double in about 36 years!

Factors behind population change

Age profile The average age of the population was 35.6 years in 2006 Dependency ratios: the young ( 64) as a % of the working-age (15-64) population = ‘economically active’ years This segment of the population effectively ‘supports’ the rest (in economic terms at least)

Dependency ratios The change in the number of persons of working age has been the main determinant of the shape of the dependency ratio graph. This population sub-group, which has grown from 1.63 million in 1961 to 2.9 million in 2006, has ensured that the dependency ratios have continued to decline during that period. What has driven the increase in the working-age population?

Dependency ratios The boom in the working age population has been driven by two factors… –Natural demographic profile of Irish population (Ireland’s baby-boom occurred in the 1970s/early 80s) –Net immigration, which has been concentrated in the working age groups

Fertility rates In 1980 Ireland had by far the highest Total Fertility Rate (TFR) in Europe at >3 (no other European country’s TFR exceeded 2.5 in 1980) Has declined since (TFR = 1.9 in 2006), but we still have one of the highest fertility rates in Europe (exceeded only by France and Iceland)

Economic Impacts of Demographic Change Has been debated ever since Thomas Malthus’ Theory of Population in 1798 –Malthus worried about the prospect of a rapidly growing population exhausting a nation’s resources and ability to produce food… Debate remains about the positive or negative impacts of population size and growth rates on economic performance… –A growing population increases labour supply and also boosts demand –But may also place a drain on resources, public finances… etc.

Economic Impacts of Demographic Change What matters most for economic growth, rather than the level or growth rate of population, is the age- specific demographic changes that a country experiences Population growth is not uniform – it occurs with bulges … ‘windows of opportunity’ “people’s economic needs and contributions vary over their life cycle… this implies that the age structure of a population may be very consequential for its economic performance” - Bloom and Canning, 2003, p232

The ‘demographic dividend’ Combination of demographic and behavioural factors… –Relatively large cohort enters the prime working years –Labour supply increases –Declining fertility and family size allow more women to enter the workforce –Output (GDP) and savings receive a boost due to increased numbers of working-age people –Improved health and longevity make it easier and more attractive to save –Private HH savings provide capital accumulation to finance growth –Life expectancy increases – more incentives to invest in expenditure… human k receives a boost

The ‘demographic dividend’ On the demand side: –Relatively large cohort of young productive workers are likely to stimulate higher consumption as they mature into the prime years for earnings potential –Investment demand will also increase with a younger productive population offering greater opportunities for high capital returns Other benefits: –Young, ‘dynamic’ workforce… –Firms increasingly follow the talent –Richard Florida’s writing on ‘the rise of the creative class’ –‘creative class’ attracted to a particular quality of place

The ‘demographic dividend’ Delivered through 3 mechanisms: 1.Labour supply 2.Savings 3.Human capital An opportunity: “age distribution changes merely create potential for economic growth. Whether or not this potential is captured depends on the policy environment” - Bloom and Canning, 2003, p233

Population profile Bulge in young worker cohort… natural growth + immigration Boosting labour supply… –Labour force growth of 17.1% from 2002 to 2006 –Labour force of 2.1 million in 2006 Also increasing human capital –Those joining the workforce have higher skills and education levels than those retiring… –In 2006, 6 out of 10 people aged 70+ had only primary education –Just 7% of year olds had only primary educ.

Population profile Immigration has also boosted human capital of population… In 2006, almost 15% of the population was born outside of Ireland 11% were non-Irish nationals Foreign population has high educational attainment: 43.8% of non-Irish nationals aged had a third level qualification (corresponding figure for Irish nationals was 41.3%)

Workforce growth Participation rates… Gap between men and women narrowing Female participation rate in 2006 at 53%, up from <30% in 1981 With females now outperforming males in education, increasing female participation should also add to human capital of workforce

Population projections CSO Population and Labour Force Projections …

Projections Depend on assumptions about: –Fertility rates –Mortality rates –Migration rates

Projections By 2021 the population is projected to reach between 4.7 and 5.7 million people Higher growth estimate of about 2% per annum (continuation of recent growth rate) Assumptions about migration account for the bulk of the variation…

Migration assumptions “While labour market trends and economic growth will have a significant bearing on future migration flows, no attempt was made to explicitly factor these into the definition of the scenarios in any detailed way. Instead the focus was kept on projecting forward recent migration trends having regard to broad expectations in relation to relevant national and international developments” - CSO Projections, p 17

Projections Number of births set to increase (the “echo effect”) “primary school” age-group will continue to grow up to 2021 under all assumptions “secondary school” age-group will decline initially, before recovering after 2011 as ‘millennium’ babies mature into this segment

Projections Working-age population will continue to increase, but at a slower rate than in recent years… why? –Smaller cohorts entering working age- group –Bigger cohorts exiting (retiring) –Lower net immigration?

Labour force set to grow by up to 2% per annum to 2021

Projections By 2041 the population could breach 7 million!!! (based on highest assumptions about fertility and migration) Changing demographic profile of the population…

Projections Population will begin to “age”… as the baby-boomers mature… Profile of population in 2041 will of course depend on births and migration rates… Higher fertility and migration rates will result in a more balanced population pyramid Population will age more rapidly if immigration slows and fertility rate declines An ageing population has significant implications for the economy… reduced savings, strain on public finances…