Shrinking Workforce the Doom for China? Some Lessons From Germany

[senheiser]

Does China's Shrinking Workforce Doom It To Economic Stagnation? Some Lessons From Germany - Forbes

Does China's Shrinking Workforce Doom It To Economic Stagnation? Some Lessons From Germany


So China‘s workforce has already started to shrink, and this has people pretty jazzed up. Ambrose Evans-Pritchard, in the course of a pretty alarmist article in The Telegraph, also made a number of actually very astute and reasonable points including the following:

Yet it is also a dangerous moment for Beijing. The Lewis Point is the great test for catch-up economies, when they can no longer rely on cheap labour, copied technology, and export-led growth to keep the game going.

The air is thinner at the technology frontier. Success depends on such intangibles as the rule of law and the free flow of ideas. Those that fail to adapt in time slide into the `middle income trap’, and most do fail.

While I thought the article was generally a bit too alarmist, the quote above make a very good point, and it’s worth noting that supposedly super-modern, dynamic China has a per-capita level of income that is much, much lower than poor old decrepit and backwards Russia. So while China has certain pockets of its economy that are ultra high tech and competititve, the economy as a whole is still very much “middle income,” and the path for a middle income country to become a wealthy ones is, as Evans-Pritchard notes, by no means an easy one.

What do I hope to add to the conversation? Well, I know that Germany has had a naturally shrinking population since the early 1970′s. Since the population was naturally shrinking as early as 1972, the labor force must, at a minimum, not have been growing very quickly all throughout the 1960′s, since the birth rate was consistently dropping and the population was rapidly ageing.

But I didn’t feel very comfortable using my hunches as “evidence” so I hopped over to the Statistiches Bundesamt, and took a look at what happened to Germany’s population during the 1960′s and early to mid 1970′s. By taking a generous interpretation of the labor force as “all people between 20 and 60 years of age” (which almost certainly overstates the actual size of the labor force since, in the 1960′s, women were not as likely to work as men) it turns out that Germany saw almost no net growth in the size of its labor force from 1960-1975. To be more precise, the 1975 labor force was only 0.5% larger than the 1960 labor force. Moreover, from 1966-1972 the German labor force was actually smaller than it was in 1960.

Meanwhile, what was happening to Germany’s economy? Was it suffering because of this acute labor shortage? Not really! Using data from FRED, I plugged in Germany’s real GDP per capita and compared it with the labor force. As you can see, Germany’s economy continued to boom despite a stagnant labor force:

Germany in 1960 was hardly a dystopian nightmare (its per capita income back then was several multiples of China’s in 2011) so the growth that it experienced over the next 15 years was meaningful, not simply the easy “catch-up” growth that has been China’s stock in trade for the past 30 years.

What, if any, meaning does this hold for China? Well it suggests, I think, that it is possible to combine economic dynamism with demographic stagnation, at least for a certain period of time. It clearly isn’t good that China’s labor force is shrinking, just as Germany wasn’t helped by the stagnation of its labor force in the 1960′s and 1970′s, but I don’t think that China’s labor force shrinkage has to be the existential crisis that many people are expecting. China will, of course, eventually have to reform the one child policy, a policy that has always been marked by an appalling level of brutality and unjustified state interference in private matters. But I think it’s a mistake to think that China is going to undergo some epochal crisis because its supply of surplus labor has been exhausted. Many other countries have gone through such demographic transitions, and while they do seem to dampen economic growth, they do not seem to extinguish it.