Workforce is aging but no need to panic

Forecasts overlook the ability of free markets to adapt
By David Brown
|Canadian HR Reporter|Last Updated: 09/05/2003

In the next few years there will be a large exodus from the workforce of retiring baby boomers, but pessimistic predictions about the effects may be exaggerated, according to a Canadian public policy think tank.

“Many studies are predicting difficult if not apocalyptic times as a result of these striking demographic transitions,” explained University of Ottawa economist Marcel Mérette in

The bright side: A positive view of the economics of aging

, written for the Institute for Research on Public Policy.

Some of these pessimists may have lost a little perspective, Mérette said in an interview. “The aging population is not a crisis, it is a challenge.”

There is no question the changes will be monumental, but Mérette said many of the predictions about the effects overlook the adjustments that will be made. It is even possible the overall economic impact of aging in Canada will be positive.

“I believe that there are numerous market and institutional feedback mechanisms in modern economies that would offset many of the pessimistic scenarios predicted,” he wrote.

Yes, the labour supply will dwindle as baby boomers retire in droves but the economy has faced challenges in the past without derailing. “We have been through different wars, the energy crisis in the ’80s. We went through problems with inflation and high government debt... but we have continued to grow and prosper and improve our living standards,” he said.

“Compared to other historical episodes this is much less scary.”

Some experts contend the aging population will become the transcendent economic and political issue of the century. A former U.S. Secretary of Commerce has gone so far as to say it could bankrupt the world’s wealthiest nations. UN Secretary-General Kofi Annan recently said the effects of an aging population will become the “dominant theme in the 21st (century).”

The theory is that massive labour shortages will seriously slow economic growth and social support systems will be strained to their limits and beyond as millions of retiring baby boomers stop contributing and start taking away from those systems.

Because the change will unfold over many years, government actions and the natural response of free markets will minimize many of the harmful effects, counters Mérette.

Economies are not static and there is a tendency among those looking at the future to forget that, he said.

“We look at previous trends and extrapolate into the future but when we do that we assume no behaviour change. We observe and assume behaviours will be the same for years to come. This is not true. We cannot extrapolate the behaviours of the future from the current behaviours.”

In fact, many things could happen that would have a positive effect on the economy.

The nature of work itself will be changing and it is reasonable to expect technological developments will reduce the need for the number of workers.

“It is worth noting that historically, useful technological change has often coincided with changes in resource scarcity,” wrote Mérette. In the 1970s for example, when there was an energy crisis, new more cost-effective equipment was developed.

Like Mérette, Jock Finlayson, executive vice-president of the Business Council of British Columbia, said the slowdown in labour force growth will not be as bad as some people are suggesting.

“I’m not as alarmist. I believe markets tend to work quite well,” said Finlayson.

If something is in short supply its price will go up which means rising wages relative to inflation. “That is not a bad thing, that is an inevitable thing. That’s how markets operate.”

Wages will increase relative to inflation but as the cost of labour increases, it is likely the cost of other inputs will be decreasing, said Mérette. Employers can expect the price of machinery and other equipment to drop. What’s more, fewer workers mean less need for equipment and office space. This too will partially offset rising wages.

Finlayson also said that companies will need to figure out ways to do more with less. Currently in the manufacturing sector there is a tendency to use more labour than what is used in other countries. He attributes this to low wages in this country.

“Labour is relatively cheap in Canada, if you look at international data we actually have quite inexpensive labour here.”

Mérette said another positive development will be the growth in human capital.

People will be more willing to invest in their own human capital development. Students are already more excited about their prospects for the future and anxious to ensure they are ready to take advantage of the opportunities that will be there, he said.

“That situation will be generalized across the population. People will be more willing to invest in their own human capital because they know that the benefits are there. I think that is very exciting.”

Some predictions suggest the surge in retirements will begin within the next five years, others say it’ll be 2010 before Canada starts to fully feel the effects. In any case, the time to begin taking action is now, said Mérette.

The government should be looking ahead to see where shortage may develop and ensure that the education system makes changes soon to prevent the shortage from developing.

Most importantly, investments in education have to increase, he said. “It is probably better to invest in children now than it is to invest in your RRSP.”

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