Demographic Shifts and their influence on the economy

Part 4 – The two dominant economies of the world over the last 150 years

In this, the fourth part of this series we take a look at The UK and The USA. The former was the dominant world economy for a whole century, up until the first world war. Even now, The UK ranks among the top 6 economies of the world and enjoys a per capita income level of USD 40,000. The United States has been the dominant power for the last 100 years. Both these countries have stark differences from Japan and Asia in the way their demography has developed. Both have taken in a lot of immigrants over the past 100 years (The USA for even longer. It’s a country that was built by immigrants). This is in sharp contrast to the Asian giants who have a unidimensional character.

The UK

The fertility trajectory for The UK is significantly different from that of the Asian Economies. To start with, it was much lower at around 3.5 during 1900 and dropped rapidly to 2 by the end of WW1. Post the great war, it quickly zoomed to 3 and then declined sharply to about 1.72 when WW2 started. There was an immediate boom after that, followed by a sustained increase till around the mid-sixties. Subsequently, it was back to levels of 1.65 by the end of the seventies. It has never really gone below 1.6 and there was a rise witnessed after 2002 too.

Life expectancy has also grown during the post-war years. Longevity is now over 81 years.

Age structure

Source: Office for National Statistics
Age structures 1976-2016
Ages	1976	1986	2016
0–15 years (%)	24.5	20.5	18.9
16–64 years (%)	61.2	64.1	63.1
65 years and over (%)	14.2	15.4	18

In spite of the continuous fall in fertility (well below replacement level), an increase in longevity, the age the structure hasn’t changed as drastically as in case of China or Japan and population has also not dropped. And this is where The UK has been different. The UK has been host to immigrants ever since the end of WW2 in a big way. In the beginning, it was from The Republic of Ireland and former colonies - India, Pakistan, Bangladesh, The West Indies, African countries. Lately, the country has seen a lot of migrants coming in from The EU. Immigration from Central and Eastern Europe has increased since 2004 with the accession to the European Union of eight Central and Eastern European states, since there was free movement of labour within the EU. The total population during the 2011 census was 63 million (estimated at around 68 million today). Britain even today sees net immigration of 200,000 or thereabouts every year and as a proportion of the population, this is very significant. By 1951 itself, about 4.2% of British residents were foreign-born and by 2011 this proportion was of the order of 13.5%.

One of the characteristics of immigrants is that initially they bump up the overall fertility of the host country but within a generation adapt to the prevailing fertility rates of the host country. This explains the periodic bump in the UK’s fertility rates as different phases of immigration occurred.

These waves of migration have made Britain multicultural and 13% of the population is now from other ethnic groups (South Asians, Chinese, East Asians, Blacks). In certain cities, these minority groups are as high as 25%. This has another dimension to it, too. Many natives, get unnerved when seeing dramatic changes in the social structure of their surroundings. In times of economic stress, this does result in backlash and unrest. However, Britain has so far been able to deal with these issues. These issues are not minor and are not resolved. One of the outcomes of all this was Brexit, when The UK voted to break away from the EU. On the other hand, the economic structure has developed in such a way that The UK remains an immigrant-friendly country overall and both the host country and the immigrants have benefited as a result. Immigrants have filled in the gap in the supply of labor and have kept the population young, as the data clearly bears out.

Consequently, the population projections for the UK are very different from that of Japan and China. The population is expected to keep on increasing, albeit at a slow pace, to reach around 78 million by the end of the century.

This doesn’t mean that Britain won’t age. Like all other countries, it will also age, but the pace of aging will not be as drastic as in the Case of Japan and China. Indeed, its increase during the last 50 years has been much slower. UK’s elderly will still grow from the current 18% to about 26% by 2040. Just 40 years ago the UK was relatively older than Japan, and it now appears that by 2050 even China will be older.

However, Immigration hasn’t solved all the problems of demographic changes. Fertility will continue to drop and the proportion of pensioners will continue to expand. The magnitude of the issue is quite large for an economy of around USD 2.7 trillion, even though The UK is a rich nation based on a per capita income level of around USD 40,000.

For example, around 55% of welfare spending (£114bn in 2014/15) was paid to pensioners, with the state pension by far the largest element of this. This expenditure is estimated to have increased by an average of £2.8 billion a year over the next five years, resulting in spending of around £128 billion by 2019/20 (source: UK parliament briefings).

Growing numbers of elderly people will also have an impact on the NHS (National Health Services) and social care expenditure. The prevalence of long-term health conditions increases with age; and according to a 2010 estimate made by the Department of Health, such conditions account for 70% of total health and social care spending in England. The Department of Health also estimates that the average cost of providing hospital and community health services for a person aged 85 years or more is around three times greater than for a person aged 65 to 74 years.

The USA

The United States has a lot of similarities with The UK. It was built by immigrants and immigration continues to happen. This has kept its population growing and also kept a lid on ageing. The US is a much larger land mass and can take in more immigrants even in future. Its economy and culture is attractive for immigrants.

The immigrant share of the U.S. population is approaching a record high but remains below that of many other countries (however, all of these are much smaller countries). The 44 million foreign-born people living in the U.S. in 2017 accounted for 13.6% of the population, according to a Pew Research Center analysis of the American Community Survey. That is the highest share since 1910, when immigrants were 14.7% of the total population. The record share was in 1890, when immigrants were 14.8% of the total. According to United Nations data, 25 nations and territories have higher shares of immigrants than the U.S. They include some Persian Gulf nations with high shares of temporary labor migrants, as well as Australia (29%), New Zealand (23%) and Canada (21%). Further, this trend has been so long that if one includes people born in The USA but born to parents who were born abroad, this number will be much bigger.

The fertility rates haven’t dropped like in Asia and in fact has been pretty stable for the last 40 years. It is below replacement rate, but immigrants have more than made up for it and the population continues to grow. Recent new data offer some optimism about the fertility picture. By one retrospective measure, at least, women are more likely to have children today than they were a decade ago. The measure is called completed fertility, or the share of women who are now 40 to 44 who have had a baby. It looks at the whole of women’s reproductive lives, not just one year, and reflects what they actually did, not what they were projected to do. The vast majority of women do not have babies after age 44, so this is the age researchers commonly use.

The biggest increases in motherhood since the 1990s were in groups of women with higher education. While women without college degrees have always been highly likely to have a child, women with college or advanced degrees had been less so, until recent years.

Now, 80 percent of women with professional degrees or doctorates have a child by the time they are 44, compared with 65 percent two decades ago, perhaps indicating that fewer women see long educations or demanding careers as a bar to having a family. And motherhood among women who have never married has risen across racial and educational groups.

More than 1 million immigrants arrive in the U.S. each year. In 2018, the top country of origin for new immigrants coming into the U.S. was China, with 149,000 people, followed by India (129,000), Mexico (120,000) and the Philippines (46,000).

Looking forward, immigrants and their descendants are projected to account for 88% of U.S. population growth through 2065, assuming current immigration trends continue. In addition to new arrivals, U.S. births to immigrant parents will be important to future growth in the country’s population. In 2018, the percentage of women giving birth in the past year was higher among immigrants (7.5%) than among US-born (5.7%). While US-born women gave birth to more than 3 million children that year, immigrant women gave birth to about 760,000. US foreign-born population reached 45 million in 2015, and is projected to reach 78 million by 2065. The descendants of currently foreign-born are likely to be a much bigger number. The USA also has an average life expectancy of 79 years.

The US population forecast looks robust and promising.

The proportion of the elderly in the population is only half of Japan and is projected to be only 23% in 2060 (recall that China is at 12% now and is projected to reach 32% by 2060). The key driver for population growth will continue to be immigration.

The progress is expected to look like this –

Year	Population (mill)	annual change	Median Age
2020	331	0.62%	38.3
2025	340	0.56%	39.1
2030	350	0.54%	39.9
2035	359	0.51%	40.9
2040	367	0.44%	41.6
2045	373	0.37%	42.2
2050	379	0.32%	42.7

The key inferences are that The United States are in a much better situation in terms of demographics than Japan or China and that The UK is not too badly off. Definitely, these countries will have the challenges of aging, but the magnitude of the shift is not as drastic as in the two Asian economies of China and Japan.

In the next part of this series we will take a look at Continental Europe and examine the effects there.

Part 1 – The key parameters that influence shifts

Part 2 – What has been the Japanese Experience

Part 3 – Greying and aging before it gets rich

Part 4 – The two dominant economies of the world over the last 150 years

Part 5 – Continental Europe

Part 6 – India’s Challenges