Catching Up?

One of the most fundamental assumptions on economic growth in the long-run is idea of convergence or catch-up growth. This is a process by which developing economies countries grow faster than their developed counterparts. The nature of this convergence process which should be seen in the context of neo-classical economics (new growth theory) depends on the overall assumptions of scale economies built into the models. This entry will not go into this in much detail but rather home-in on the case of the Eastern European transition economies, often also referred to as the lynx economies alluding to their comparison with the Asian tigers.

The main point of departure is the May monthly bulletin from the European Central Bank (ECB) which includes an article on the determinants of growth in Central and Eastern Europe. In many ways the analysis is a plain vanilla application of the Neo-classical growth model with the inbuilt assumption that institutions matter and as such that growth perhaps should be seen as endogenous instead of exogenous as it was originally proposed by Solow. However, the authors' main thrust raises some very interesting points. Apart from the standard (and also important mind you) recommendations to ensure credible fiscal and monetary policy, increased spending on R&D, elimination of red tape to improve the attractiveness of the business environment the authors also note the crucial importance of investing in human capital as well as the need to address the structural labour market mismatch.

Now all of this in the East European context needs to be understood in the light of two mechanisms which are currently at work. One of these is the catch-up process itself, and this process entails a steady move up the value chain and of course if the country's human capital endowment does not move to match this development it will create bottlenecks. However, a more crucial point is this ...

The existing skill mismatches may be affected by the increased migration of labour from the CEE countries to some of the other EU countries following the opening of their labour markets. Given that young and qualified workers typically show the highest propensity to migrate, increased east-west migration within the EU, while generally beneficial and desirable in economic terms, may temporarily aggravate existing labour market bottlenecks in some sectors in the CEE countries. At the same time, the skills that these workers acquire abroad may support productivity growth in the long run, provided that the large share of current migration is temporary in character.

The first thing to notice is that this impact of migration flows and their subsequent affect on the labour market, and indeed abililty to move swiftly up the value chain, was exactly the critique I levied recently towards the large World Bank report on migration in Eastern Europe, the CIS, and Asia. Secondly there is of course the last part of the extract which talks about how net emigration in the long run might support productivity growth as the skilled labour returns to their home country to offer their highly productive labour. This is a bold assumption and far from certain I think. More generally, and despite the authors' ardent efforts, they are, I think, bumping against the frontier in terms of the explanatory power of neo-classical growth theory here. As such, the suggested remedies of increasing labour market reforms and investment in human capital seem to me to be missing the main point at issue. In short, we are dealing with countries where the demographic transition by far, and indeed worryingly, has outpaced the traditional economic process of economic convergence.

At some point these two processes will intersect (they are perhaps doing so already?) and the reality will be that these countries will have serious problems in nudging up the value chain. An interesting data point here is that the labour market for the tertiary (i.e. services/high value added) sector is already extremely tight in the all of Eastern and Central Europe. The average unemployment rate in these sectors is at a staggering 3.27% - with lows in Lithuania, the Czech Republic, and Latvia at 2.4%, 2.5% and 2.6% respectively. Combined with very high unemployment levels in the primary sector this does of course suggest that there is plenty of room for targeted investment to exert a pressure which transfers general capacity up through the value chain, but with the sustained process of ageing which these countries face (and the difficulties that this poses in terms of altering their skill profile) this looks as very difficult task indeed.

Regarding the low unemployment rate in the tertiary sector, conventional wisdom would of course envision that this would keep those engineer graduates at home or perhaps persuade those who have left to come back. Yet, what if the extremely low unemployment rates is a function of something else and more structural? What if in fact the low unemployment rates is a reflection for a general scarcity of highly skilled labour? This would then suggest a more structural capacity issue rather than the traditional notion of a labour market mismatch. In this case it is of course not exclusively one or the other but since the structural capacity issue is only very rarely mentioned I think it is important to emphasize this, and especially in connection with the trend of net-emigration of skilled labour. A concrete example of this capacity constraint and labour market mismatch can be found in Poland as I noted over at Alpha.Sources some time ago:

(from the FT)
Poland’s rapid leap in productivity is taking place in spite of the drag caused by the 20 per cent of the Polish workforce that is employed in agriculture – producing only 3 per cent of GDP. The country also has the highest level of unemployment in the European Union, at 17.8 per cent, and the lowest level of labour participation in the OECD, the world’s most industrialised countries.

Many of those out of work are unemployable in a modern economy and some Polish companies are experiencing difficulty in finding qualified workers. A recent study by Poland’s central bank found that 42 per cent of firms had trouble finding qualified workers.

The reason why many of these unemployed workers might be considered "unemployable in a modern economy" is of course their comparatively low level of education and their comparatively old age, and it is the combination of these two which presents the problem.

This effect is of coursed primarily and in the short run driven by sectoral labour market mismatches but more structurally it is exacerbated by outward migration and a structural decline in the labour force as a result of ageing. And despite the increasingly tighter labour markets it is exactly this potential vicious circle which should lead us to be rather cautious about assuming a great reversal in migration flows.

In Summary

So, there you have it; another dose of demographic fundamentalism. Well, after all this is the 'demography.matters' blog so it should not come as much of a surprise. Having said that I am not fundamentally at odds with the traditional economic analysis fielded in the ECB article noted above. Without a doubt there is much pertinence in their general analysis. However, I do think that it fails to adequately factor-in the demographic component of long term growth and in this case the ability of these economies to sustain the convergence process by continuously moving up the value chain. However it should be noted that all the signs still point to a continuation in the convergence process, at least for now. Consequently, if you look at growth rates in, for example, the Baltic countries these are still very healthy. The question really, of course, is just how long this can be sustained and whether in fact these economies can decidedly shift their economic activities in the effort towards a long run steady state (or process of continuous endogenously driven growth)?

Post scriptum ...

In terms of general sources on this topic I recommend the following ...

This publication from the UN (PDF!) which describes the process of very rapid fertility decline in the Eastern and Central European transition countries from 1982-1997.

This publication from the European Bank of Reconstructuring and Development (PDF!) which attempts to give an overview of the impact from ageing on pension systems and public finances in the transition countries.

And finally I can hardly take on this subject without also noting Edward Lucas who is the Eastern and Central European correspondent for the Economist. Over at his blog, he posts relentlessly on the region's economy, politics, and society. As a one stop source for information on the topic at hand you would be hard pressed to find anything more informative than Edward Lucas' writings.

Migration and Germany

The German Federal Statistics Office has released the migration flow data for 2006:

As reported by the Federal Statistical Office on the basis of provisional results, 662,000 persons in-migrated to Germany in 2006 and 639,000 persons out-migrated. This results in net inward migration of 23,000 persons. That was 46,000 in-migrations less and 11,000 out-migrations more than in 2005. Consequently, net inward migration decreased strongly from the previous year (–71%), following a decrease by just 4% from 2004 to 2005.

So there is a net inward balance of migrants in 2006 of 23,000. In view of the significant ageing process which is taking place in Germany this is indeed preoccupying. We have commented on this situation on DM a number of times (and here). In today's Financial Times there is some evidence of the impact the lack of substantial inward migration is having on some sectors of the German economy:


Germany’s decision to restrict the working rights of east Europeans is hitting consumers where it hurts – their asparagus steamers.

After this year’s warm, wet spring, the sandy plains of central Germany should have yielded an asparagus vintage for the history books. Instead, entire fields of the delicacy are rotting unplucked. Farmers, politicians and economists are scrambling for an explanation.

At the Federal Statistical Office, which charts the amount produced in the country, experts are warning about a paradoxical year, with a harvest below the record 82,000 tons registered in 2005 despite better growing conditions.

Everyone agrees on the reason; there is a shortage of pickers. The 300,000 foreign seasonal hands, mainly Poles, who normally work the three-month “Spargelsaison” seem to have better things to do this year.

Jürgen Jakobs, who runs a farm in Beelitz, the Vatican of asparagus culture, says only two-thirds of the 300 Poles he wanted to hire this year bothered to respond, forcing him to leave 15 per cent of his land unharvested. These fields are now covered in two-metre high, inedible green ferns.

For free-market liberals, the blame lies with government. Last year Berlin was one of six older members of the European Union to extend restrictions on citizens from new member states working in the country......

Herbert Buscher, economist at the IWH research institute in Halle, agrees that Germany, whose booming economy is now suffering from drastic shortages of workers in certain sectors, has “shot itself in the foot with its restriction to the free movement of workers”.

I would emphasise at this point that there are three things to think about here.

a) the German labour market is obviously suffering a net human capital loss (just like Italy) since those leaving are better educated than those arriving. This will have an impact on productivity growth (and TFP) in the future.

b) Germany will undoubtedly have to change course on migration since they have basic needs in areas like agriculture and care of the elderly that they simply cannot meet domestically. These are also two areas which have been important in Spain. Almost no Spanish nationals are new entrants into the unskilled end of these sectors.

c) the fact that Germany is not able to generate a SUSTAINED construction boom means that it will not get - whatever the changes in policy - the volume of migration necessary to generate the feedback mechanisms we see at work in Ireland, the US, the UK, Greece, Spain etc, and thus and thus the new migration they may get will not materially affect the population ageing process in Germany, or produce the much needed revival in internal consumption.

For some economic explanation for the assertion made in (c) see this recent post on Ireland and this one on migrant flows into the US.

My guess is that all those societies who have inadvertently let their median age rise significantly over the 40 watermark are going to be faced with significant issues in this regard.


Update

This human capital impact of Germany's outflow is one topic which seems to be gaining traction. I am updating with some extracts from this to the point piece in the Independent yesterday:

German brain drain at highest level since 1940s


Leading economists and employers say the trend is alarming. They note that many among Germany's new breed of home-grown "guest workers" are highly-educated management consultants, doctors, dentists, scientists and lawyers.

OECD figures show that Germany is near the top of a league of industrial nations experiencing a brain drain which for the first time since the 1950s now exceeds the number of immigrants.

Stephanie Wahl, of the Institute for Economics, based in Bonn, said that those who are leaving Germany are mostly highly motivated and well educated. "Those coming in are mostly poor, untrained and hardly educated," she added.

Fed up with comparatively poor job prospects at home - where unemployment is as high as 17 per cent in some regions - as well as high taxes and bureaucracy, thousands of Germans have upped sticks for Austria and Switzerland, or emigrated to the United States.

Yesterday, the country'swoes were underscored by a report which disclosed that areas of unemployment-wracked eastern Germany were populated by a "male-dominated underclass susceptible to far right ideology" because of a dramatic 25 per cent exodus of young women aged 18 to 29.

More than 18,000 Germans moved to Switzerland last year. The US was the second most popular destination with 13,245, followed by Austria with 9,309.

Switzerland already has a resident German population of 170,000. Its presence has even provoked a xenophobic backlash in the country's tabloid press. Earlier this year, the Swiss newspaper Blick ran an anti-German campaign which spoke of a "German invasion" and quoted readers who claimed they found the German immigrants to be "arrogant and rude". Many immigrants, however, say the benefits of lower taxes and pay up to three times higher than at home far outweigh the occasional xenophobic outburst.

Claus Boche, a 32-year-old executive, left the west German city of Paderborn two-and-a-half years agoto take up a job with a Swiss management consulting firm. He now lives in Zurich. "Nearly everything is less bureaucratic and more go ahead than in Germany," he said. "I also pay about 40 per cent less tax. I have no plans to go back."

The current exodus hardly fits in with the official view of the German economy, which is said to be "booming". Although jobless figures for May were reported to be marginally up yesterday, Chancellor Angela Merkel's grand coalition government of conservatives and Social Democrats has taken credit for a steady 13-month decline in the country's unemployment to below four million.

However, the gradual economic upturn has so far failed to halt an exodus of the country's well-trained. Thomas Bauer, a labour economist from Essen, was scathing about Germany's employment conditions. "Germany is certainly not attractive when compared to other countries in Europe," he said. "The taxes are too high, the wages are too low and feelings of jealousy towards high-income earners is widespread. This is a special deterrent to the highly qualified."

Childbearing in Europe

As I mentioned in this post, the Population Association of America annual meeting 2007 played host to quite a large number of very useful and enlightening papers. From time to time I will try to highlight some of the more interesting ones among them here on Demography Matters.

In this vein, I would like to touch in this post on some of the questions raised in the paper Childbearing Trends and Policies in Europe: Is a new Demographic Disequilibrium Emerging? presented by Tomas Frejka, Jan Hoem, Tomáš Sobotka and Laurent Toulemon.

As the authors explain the paper is in the form of a report on "work in progress" and presents selected findings and conclusions from an international comparative research project which started in October 2005 - sponsored by the Max Planck Institute for Demographic Research - and involves the study of 18 countries: Albania, Austria, Bulgaria, Czech Republic, France, Germany, Hungary, Italy, Lithuania, Netherlands, Poland, Romania, Russian Federation, Slovak Republic, Slovenia, Spain, Sweden and Ukraine. As such the findings of the research - which will be finally presented in book form - represent an important source of data and analysis.

Now the authors define their project in the following rather radical terms:

In 1933 Landry concluded in his theory of the la révolution démographique that in a third pattern “there is no longer an equilibrium.” In 2001 Chesnais reminded us that Landry “envisaged a scenario of ‘permanent disequilibrium’ ”… and stated that “(T)here are strong arguments in favor of the eventual globalization of the birth deficit” … in which “(T)he long-term downward trend seems irreversible.” In 2003 Van de Kaa reflected that “(P)erhaps it is now time for someone to start thinking about writing a … volume entitled: ‘The Postmodern Decline of Population’. For Europe’s demographic future appears to be a thing of the past.” This volume is the initial attempt to write such a book. It is an assessment of whether humanity is facing a new demographic disequilibrium.

Now talk of an "irreversible" demographic disequilibrium may seem like strong language, but a long hard look at the available evidence may make the use of such terminology not so extreme as it seems at first sight. In most advanced countries fertility has long dropped below replacement rate, and in many cases well below this level, and trends in the developing world now give clear signs that this pattern may well continue to repeat itself. Obviously the idea of a planet with a somewhat smaller population level is not necessarily a bad thing in and of itself, but this idea of "disequilibrium" is perhaps rather more disturbing, since it does raise the question of just how, and when, the present trend may be reversed.


Turning to the European context, as the paper states:

a) With the possible exception of Albania there was not a single European country in 2004 with fertility at or above the replacement level (Council of Europe 2006).

b) As of 2004, 17 out of 38 European countries with over 100,000 inhabitants, 45 percent, had negative rates of population growth. This is a very recent phenomenon. In 1990 there were only three such countries. In some countries the negative rate of natural increase is offset by immigration. Nevertheless, 14 of the 38 countries had negative rates of population growth.

c) In 2002, 16 out of 39 European countries recorded period total fertility rates (TFR) below 1.3 and 25 countries recorded period TFRs below 1.5. The ‘lowest-low’ fertility spread throughout Europe affecting countries with more than one half of the European population by 2002, up from nil in the early 1990s. This proportion subsequently declined as the TFR in several large countries reverted above the threshold of 1.3. The spread of such low period TFR levels has been closely linked to the postponement of childbearing taking place in all regions of Europe. Almost three quarters of Europeans currently live in societies with the TFR below 1.5.


The key point to grasp is perhaps that the principle driver of the lowest-low reading which is being registered on the TFRs has been the phenomenon known as birth postponement. This impact is a result of the fact that during a long period of time - as average first birth ages move steadily upwards - comparatively few children are actually born, and this gives rise to a rather distorted TFR reading, since as some of the women who have remained childless during their 20s move up the age ranges they may (and do) start to have children - the so-called recovered births - and hence a certain recovery in final fertility rates, or completed cohort fertility rates, may occur. (The reasoning which lies behind such thinking is explained further in this post here)

Now there is one proviso to be made at this point, and that is, as Claus and I have been recently explaining (and here)the real possibility exists that some of these countries with lowest-low fertility are caught in some kind of low fertility trap. This may not be a permanent trap, but it is a process which could last for several decades or even generations, and if this were to prove to be the case the issue would be a fairly serious one since the long term structural impact on national demography (and probably economic growth and living standards) would be important. So even if the "recovered births" may finally make their presence felt, if this were only to happen in several decades time, the population structure (and of course the reproductive generational base) would be seriously affected, and with long lasting consequences. As they say, demographic processes tend to cast a long shadow.

Now it is also important to bear in mind that there is below replacement fertility and "well-below" replacement fertility, so while it may be thoroughly unrealistic to think in terms of a large scale and generalized return to the magic number of 2.1TFR, fertility in the 1.7 -1.9 TFR range might be a much more manageable affair for our societies than ongoing fertility in the 1.3 - 1.5 TFR range. As the authors of the paper note:

There is a general consensus among scholars that “maintaining fertility at a level that does not fall much below a two-child average – say, around 1.7 – 1.8” (Demeny and McNicoll 2006:281) could be sustainable for a prolonged period.

So the tricky question is, just how can we nudge fertility up in those societies who might be deemed to be stuck in or around the lowest-low range?

Just how extended this lowest-low fertility issue is in Europe right now (although the problem is by no means a European one, since several Asian countries - including possibly China - may well already be affected) can be seen from the following charts presented in the paper (incidentally for a better view of the charts simply click over them).


Chart 1: Number of European countries with the period TFR below 1.7, 1.5 and 1.3 (out
of 39 countries with population above 100,000 in 2006)



Chart 2: Proportion of Europeans living in countries with the period TFR below 1.7, 1.5 and 1.3




Now as we are noting, the core of the problem seems often to be associated with a strong postponement process and a very rapid rise in mean ages at first childbirth. The next two charts should make this clearer in a European setting.

Chart 3: Mean age of women at first childbirth in selected countries and regions of
Europe, 1960-2004 (arithmetic averages)



Chart 4: Proportion of childbearing realized by women below age 25 in selected countries and regions of Europe, 1960-2004 (arithmetic averages)




Now the core of the "recovered births" argument focuses on the idea that the artificially low reading being registered on the period fertility TFRs is masking a much healthier situation in terms of the longer run cohort fertility rates. However, if we look at the long run trends in CFRs (see charts below) we will see that matters are not quite this simple.


Chart 5 - Total cohort fertility rates, selected WestEuropean countries, birth cohorts 1915-1970





Chart 6 - Total cohort fertility rates, selected Central and East European countries, birth cohorts 1924-1973



In fact what we can see, is that in general terms long run European CFRs are in continuing decline, and the only clear examples of a change of course come from societies - like Sweden and France - with a long tradition of systematic (and relatively expensive) pro-natalist policy. As the authors note:

"Even though it is not known to what degree childbearing will be recuperated, it can be surmised but not proven conclusively that quantum declines are a part of the trends of fertility behaviour of women in the midst of their childbearing in a number, possibly a majority, of European countries."

And here perhaps precisely we hit the problem: it can be surmised but not proven conclusively. And in this gap between what is surmised and what is proven lies a space which allows public policy - at least in an EU context - to languish in neglect, since after all, if it isn't conclusively proved, what is the justification for priority action.

Well, I come back to the quote I offered at the start of this post, European populations in many cases are in "demographic disequilibrium". At this point it is not clear whether or not this process is "reversible", but - and especially given the fact that, as Claus and I keep arguing, some of the economic consequences of this disequilibrium are already being noted at the level of economic processes and imbalances - doesn't it seem rather foolhardy to wait until we know for sure (and especially if in the end, by the time we are able to decide, they should prove to be non-reversible) before we really "take the bull by the horns". Put another way, is it not now time to act, and decisively?

Fertility: Lower or Later?

Childbearing decisions at advanced ages -especially in developed countries- are driven by two competing considerations: later phases of the life cycle have usually more economic resources available for the raising of children, but the biological process itself is significantly more uncertain and potentially dangerous. As the continuing advance of reproducive technology lessens to a degree the age-related biological constraints, late childbearing might become a significant demographic factor, specially in low fertility countries. As is often the case, whether this comes to happen or not will depend both on the feasibility of technological solutions, and in their interaction with the sociologically driven desire for late childbearing.

A relevant paper is Approaching the Limit: Long-Term Trends in Late and Very Late Fertility (Billari, Kohler, Andersson, Lundstrõm, Population and Development Review, March 2007). Their conclusion indicate that, for the moment at least, late childbearing isn't a very significat demographic factor.

Our empirical analysis of Swedish data shows that since the 1980s the numbers of births to women aged 40+ years and 45+ years have been rising. However, fertility at ages 45+ still constitutes only a minuscule fraction of overall births in 2005, and the contribution of late and very late fertility is currently far below the levels observed in the twentieth century until about 1960.

In effect, there were in 2005 3,420 births to women aged 40 and over, or 3.4 percent of total births, while at the beginning of the previous century they accounted for more than 12 percent. It is important to remark, tough, that low parity births at advanced ages is a relatively new phenomenon; traditionally, children born to mothers aged 40 and over were high parity births.

One of the reasons for the relatively low number of late births is the fact that assisted reproductive technology is still a nascent technology, relatively speaking. Quoting again from the paper,

In 2002, the probability that a 40-year-old childless woman will ever have a child is 7.48 percent, compared to 3.26 percent in 1970.

These numbers indicate both the undeniable technological progress, and its inherent difficulty. This difficulty is one of the factors that make the decision to have children at an advanced age a complex one, even in the absence of (or with lessened) societal and economic constraints. They are still procedures with significant rates of failure, and with important psychological and physiological consequences.

At the same time, this suggests that actual late childbearing must still be below the potential demand for it in the presence of more advanced assisted reproduction technology. As there are significant indications that these technologies will undergo important advances in the future (e.g., via our increased knowledge of the genetics and molecular biology of aging), it is likely that we will see a much larger number of births to mothers of advanced age, above and beyond the increases due to general population aging.

Whether this will have a significant demographic impact or not remains to be seen.

Low Fertility Trap Follow-up

In his last post Claus has offered us a nice summary of the latest revision of the low fertility trap hypothesis as advanced by Wolfgang Lutz et al. As summarized below, there are three basic components to this hypothesis:



As Lutz says the key idea is that once fertility falls below a certain level (and even in the event that the hypothesis proved to be well founded this level could only be determined empirically, on the basis of actual experience) a self-reinforcing demographic regime may be established from which it is hard to escape, in the sense of raising fertility back up towards replacement levels. The cut-off point which Lutz et al start from is 1.5 (and in this they take their lead from a proposal by Peter Macdonald in this paper ). This figure does seem to have some coherence in terms of actual experience to date, since with the exception of Denmark - which did briefly fall under 1.5 tfr in the 1990s - no country seems to have gone below it and come back up again.

The explanatory mechanisms we are offered are full of self-reinforcing feedback processes, as can be seen from the diagram below (incidentally for a better look click over the image):




As I said, the whole process is described in terms of three basic components (LFT1,LFT2 and LFT3 respectively). The first of these - the negative momentum component - does not, of course, affect fertility (in terms of the TFRs of those of childbearing age) directly, but it does affect the shape of the population pyramid, and in this way it affects the future shape of the pyramid by influencing reproductive cohort size and also may influence social attitudes to childbearing. There may also be an impact on the third mechanism, the economic one, as I shall try and argue below.

But first an illustration of the negative momentum phenomenon at work. Fortuitously, and as part of the Mothers Day celebrations in Germany, the Federal Statistical Office recently put the following results of a microcensus online:

As reported by the Federal Statistical Office on the occasion of Mothers Day on 13 May, about 1.9 million mothers in Germany aged 15 to 64 years raised young children of under three years in the household in 2005. That are about 154,000 mothers less than in April 1996. This is shown by current results of the microcensus, the largest household survey in Europe. In this context, children include not only natural children but also stepchildren, adopted children and foster children. The microcensus results also show that the number of mothers with young children in the former territory of the Federal Republic (excluding Berlin) was down by 225,000 from 1996 to 1.5 million in 2005, whereas in the new Länder (including Berlin) it rose by 71,000 to about 346,000 in 2005.

The upshot of what they found in the census is that were 150,000 or so less mothers of children under three in 2005 than there were in 1996. That is a cohort width shrinkage of something like 5 - 6% in nine years, which I think is quite a lot. And of course with below replacement fertility on and on it goes. (The reasons for the apparent disparities between East and West would need further examination, although several possible explanations immediately spring to mind, including some rebound from the very dramatic collapse in East German fertility which took place after 1990. There may however also be changing cohort size elements from previous generations at work, as we all know demographic processes tend to cast a long shadow).

Turning now for a moment to the ideational mechanism, and over and above the material which Claus refers to, I recently came across the following interesting box diagram which shows cross generational changes in the proportion of women who regard the answer "none" to the question about the desireable number of children to be appropriate (again, click to enlarge):




Now what is striking here is the situation in the German speaking countries, where the percentage in Austria who are willing to answer "none" is now 12.6%, while in Germany it is 16.6, and in both cases this is a large and significant change over the previous generation. This conforms to the argument Lutz et al themselves put forward when they say:

"The sociological mechanism of the Low Fertility Trap Hypothesis (LFT 2 in Figure 1), is that the assumed is that young people are socialized in a way that they internalize the family size norms which they experience around them in term of actual fertlity. This suggests that ideals will decline about one generation length after the decline in TFRs. This timing fits quite well to the German speaking countries which were the first to enter a steep fertility decline in the 1970s and which in the 2001 Eurobarometer are the first to show significantly lower personal family size ideals for the younger age groups."

The change in attitudes to childlessness reveals yet one more mechanism whereby this decline in average desired family size may be working. What would be interesting would be to know more about why childlessness is becoming more socially acceptable, and why the effect is so strong in German speaking countries.

Moving on the LFT3, the economic component, Lutz et al tend to focus this on a cohort-type effect, based on the changing relative income position of young people vis-a-vis their predecessors 20 odd years ago:

"We study data on earnings by age, gender and education for full time workers over time. As can be seen by Figures 2 and 3, individuals aged 20-34 earn the least. The Figures also show that the young have profited less from the economic growth relative to the other age groups, and that in Canada they actually experienced a decrease in real wages (while other age groups had a rise) since 1981. In the UK women aged 20-34 had a positive, but relatively slow wage growth, where the 35-49 year have a 66% higher wage growth than those aged 20-34. The negative development of income for women in their peak-childbearing years may represent one reason why that fertility timing is postponed and fertility outcome is lowered."

Now this data is interesting, and the situation revealed obviously forms part of the environment in which young people take their childbearing decisions, but perhaps from the point of view of the fertility trap hypothesis something is missing, since these changes do not, in and of themselves, seem to be produced by demographically induced processes and as such they may not be considered self-reinforcing. What might these changes be due to? Well, globalisation processes for one, and technological changes for another. When I say technological I am thinking of the so-called "changing skill bias of work" argument, which would seem to imply that in order to achieve the higher salaries which go with higher value added work young people need to acquire more education and relevant experience. This factor certainly may act as an incentive to delay having children.

However, in line with the exogenous shock idea, the data Lutz et al seem to have studied is cross-country data regardless of Tfr, whilst what would really be needed to validate the economic mechanism Lutz et al advance as part of their trap-feedback hypothesis would be data which correlated earnings for young people (under say 30) with Tfrs, and showed that as the Tfr dropped below 1.5 this income effect became more pronounced (or vice-versa if you prefer).

But in the final analysis the key point about both the globalisation and the technology arguments is that they are better seen as exogenous (ie external to the system) shocks, which have a "level effect" impact in terms of the timing of the first birth decision. For the fertility trap hypothesis to have internal coherence what we need are endogenous processes, ones which are internally driven by the model and repeat and repeat.

Based on the work which Claus and I have been doing on the Life Cycle Model of consumption and savings in the context of rising median ages (see, for example, this post)I think we may well have come up with just some of these.

Essentially the argument, as it is presented here, is that as median ages rise beyond a certain point - 42/43 let's say - the structural characteristics of the economy change. While younger economies - let's say with median ages in the 35 - 39 range - are driven by large scale borrowing (on aggregate), domestic consumption surges, and, of course imports and current account deficits to match the domestic savings weaknesses, the more elderly ones can exhibit higher relative savings levels (Japan, German, Italy, Finland, possibly Switzerland), can no longer rely on domestic consumption to anything like the same extent, and increasingly come to depend on export growth for GDP growth.

Now, of course, this produces a mechanism whereby four things happen:

1) In order to compete for exports these economies have a permanent pressure on their tradeable sectors, whereby outsourcing is continuous and ongoing, wages are continuously compressed, and structural reform is permanent. Since the very export dependence is only further reinforced by the continuing process of change in the population pyramid (ie domestic demand never "recovers" as such) this is all self-reinforcing. That is the more time passes the more there is downward pressure on the wages of young people.

2) Due to the comparatively lacklustre economic growth performance there is a constant shortfall in the tax income necessary to guarantee existing welfare and pension commitments. This shortfall is produced by the low levels of trend growth (think Italy, Germany and Japan) which you can generate exclusively on the basis of export growth. Since the changing pyramid structure (here is another part of the feedback loop) means that an increasing part of the voting population comes to be over 50, the tendency, as we are in fact seeing, is to attempt to maintain welfare commitments by increasing the tax burden, which affects the consumption and earning possibilities of the young directly.

3) Migration factors. The general lack of growth in the economy, and the tendency towards increase retirement ages and higher participation rates at the older ages, all mean that there is a relative lack of well paying jobs at the entry level, a phenomenon which makes outward migration an increasingly attractive proposition for educated young people (again, as we are seeing in Germany and in Italy). This out-migration once more feeds back into the structural evolution of the population pyramid. If the out migration is in part compensated for by in-migration of lower skilled workers, then this tends to retard the process of moving towards higher value work, a feedback which one more time would seem to find reflection in lower wage levels on average in the younger age groups.

4) Impediments on pro-natal policies. The pressure on fiscal resources which result from the previous three factors mean that effectively it becomes increasingly difficult to generate the resources to finance really meaningful pro-natal policies which might attempt to "tease" fertility back up towards a higher level. As time goes by this problem only gets worse.

OK, these are really simply a set of working notes. Comments, as always, welcome.

The Fertility Trap Hypothesis ... Revisited

As the postings, and most notably and impressively the commenting, here at DM are once again ticking along nicely, I thought that I would revisit an oldie but goldie topic, namely the concept of the fertility trap. Waaay back in 2005 :) Edward offered us a very nice summary of the fertility trap hypothesis as it has been conceptualized by the Austrian demographer Wolfgang Lutz. Back then Edward ended his post asking whether new evidence of the hypothesis would be found in the Eurobarometer survey which was due in 2006. Now it seems that we are ready answer that question as Wolfgang Lutz and co-authors inform us in a paper given at this year's PAA 2007. What follows is a cross post from Alpha.Sources of this new contribution together with yet another account of the hypothesis itself;

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In order to situate the idea of the fertility trap we need to think first about the demographic transition. As is well known that one of the consequences of the demographic transition is a drop in fertility rates as a country develops economically and in particular the drop below replacement as the country enters the final stages of the transition.

What was not so obvious to those who originally formulated the transition thesis was the nature and extent of this decline in fertility, and crucially, as we can see now see clearly, the fact that fertility rates do not stabilize at replacement level (2.1). This brings us to the core of the The Fertility Trap Hypothesis. The hypothesis does not seek to explain why and how far fertility might potentially drop below replacement levels but rather attempts to outline the mechanisms which may serve to keep fertility rates in a perpetual low state once they reach a certain lower limit (1.5). As such the hypothesis tries to demonstrate how some countries are at risk of entering a trap, as it were, which perpetually depresses their population momentum. My impetus for this entry comes from the recent PAA2007 meeting where a slew of papers and articles on demographics were reviewed, among them an article by Wolfgang Lutz, Vegard Skirbekk and Maria Rita Testa entitled New Empirical Evidence on The Low Fertility Trap Hypothesis (PDF - extended abstract). Reading through the abstract we also get the theoretical foundation (elaborated more in this paper) for the fertility trap hypothesis which as outlined consists of three mechanisms;

(i) a demographic mechanism (LFT1),
(ii) a sociological mechanism (LFT2)
(iii) an economic mechanism (LFT3).

These mechanisms are of course explored in great detail in the sources presented in this entry (see list of references below) and I will then only briefly summarize them here.

• The first mechanism of the fertility trap hypothesis is described as the demographic mechanism and essentially it refers to the potential effect of a situation where fertility drops consistently below 1.5 live births per woman per year. In essence, the demographic mechanism shows us why y-o-y fluctuations in TFR really mean very little in the general perspective and that a much broader perspective is needed. The demographic mechanism works through the impact of negative population momentum. The main point is that the age distribution of the population acts as an additional variable (i.e. independent) to influence fertility apart from actual realized fertility in that period. As such this mechanism acts independently from current fertility on the basis of past fertility, mortality and migration (Lutz et al 2005). What we consequently need to think about here is that a period of very low fertility exerts a structural damage on the pyramid which affects future fertility from a relative point of view to bring future absolute numbers of live births down even if TFR suddenly (and hypothetically) jumps to replacement levels (Lutz et al. 2005).

• The second mechanism is derived from sociology and is based on the concept of personal ideal family size which is said to exert influence on total cohort fertility (Lutz et al. 2005). In terms of the actual of ideal family size it is said to lag actual fertility by some margin but more importantly, empirical data suggests that ideal family size is declining in several European countries. In terms of the formal mechanism the ideal family size today is said to be a social norm as a function of previous generations' ideal family size. As such, the process of adapting social norms and learning from generation to generation might work in such a way to accentuate a process of fertility decline because the decrease in ideal family size is socialized from one generation to another (Lutz et al 2005). Of course this could also be somewhat tied together with Becker and Barro's idea of the quantum effect of fertility decline essentially derived from the realms of economics but I will leave that question aside here.

• The third and last mechanism is derived from economics and more specifically from Easterlin's relative income hypothesis. In essence, Easterlin's relative income hypothesis states that it is not the absolute expected income which is important but rather income relative to expectations formed in youth. The conceptualization of this mechanism thus assumes that fertility is dependent on the relationship (gap) between by aspirations of income and expected income and as the gap increases we will see both a increase in both the quantum and tempo effect of fertility.
  

So, in terms of a general introduction of the fertility trap hypothesis this is pretty much what you need to have in your head at a first glance. Moving on to the actual operationalization of these mechanisms we of course need to be more specific. In essence, we could also say that the first mechanism (the demographic one) in itself represents the fertility trap and its dynamics whereby the two other mechanisms become explanatory variables in terms of what potentially may sustain and exacerbate this negative demographic momentum. Another point is of course the idea of a trap below a TFR of 1.5 which is crucial for the understanding the idea of this theory. As such, the threshold of a TFR of 1.5 represents the level where anything below risks causing a cumulative acceleration of the three mechanisms noted which then makes it exactly a trap from which recovery will be very difficult.

Turning now to the empirical foundations for this hypothesis brings us to the recent contribution presented at the PAA 2007. So let's take a look at the recent data presented in the paper abstract from Lutz, Skirbekk, and Testa at the PAA 2007. Specifically, we have the very recent evolution of ideal personal family size which is shown in the two figures below based on data (see the abstract) from Southern Europe and France. As we can see the decline might look ever so slight but once we get the figure in percentage form it shows that the decline in some countries is pretty hefty given the fact that we are only talking about a period of 5 years. Moreover, note that Italy's personal ideal family size is fast approaching sub-replacement levels and seeing that this is a lagging factor of actual fertility decline the evidence for a traps seems particular sinister here. Of course the drop in Spain's ideal family size of about 9% is also something to watch.

Regarding the data on Easterlin's relative income hypothesis I will refer to the tables and graphs in Lutz et al's extended abstract. The stylised facts are clear, income for women in their peak child bearing age have declined relative to older age groups which may serve to exacerbate the tempo effect of fertility decline as it materializes in terms of increased birth postponement (Lutz et al 2007).

Summing up, I see this post as a kind of intro to the fertility trap hypothesis as it has been conceptualized by Wolfgang Lutz, which is in part based on an elaboration of Peter Macdonald 's 2005 - Fertility and the State: the efficacy of policy. And concluding with some general questions and remarks I would like to note the following:

To what extent is the idea of a fertility trap applicable in a universal sense across socities in general? Traditionally, the idea of a fertility trap has been conceptualized in connection with southern European countries. Having said that the mechanisms on which the fertility trap hypothesis rests seem to be universally valid to be examined across many societal environments.

If the fertility trap really exists, how might a country escape? What follows from this is of course the immediate point that the extent to which the fertility trap hypothesis is true paints a very grim outlook for population dynamics in some countries with no imminent way out of the misery. Of course, a positive demographic shock through immigration as experienced in Spain for example might postpone the effects but given the first mechanism noted above merely postpone the inevitable given the cumulative effects of fertility decline.

Lastly, are the mechanisms valid? In terms of the first one there is little to be argued I think since this is essentially pure arithmetic and as such this effect also occurs at fertility levels above 1.5 but may only exhibit a particular 'trap-like' behavior once fertility is sustained below 1.5. As for the other mechanisms they are of course hypotheses in terms of explanatory variables of total actual fertility and may hold different explanatory power pending on the country of question.

List of References

Lutz, W., V. Skirbekk, M. R. Testa forthcoming (2005) "The Low Fertility Trap Hypothesis"
Vienna yearbook of population research. Vienna: Austrian Academy of Sciences Press.

Lutz, W. and V. Skirbekk. (2005). "Policies Addressing the Tempo Effect in Low Fertility Countries", Population and Development Review. December: 703-725.

McDonald, P. (2006). “Low Fertility and the State: The Efficacy of Policy”, Population and Development Review. 32, no. 3 (Sep 06): 485–510

Testa, M. R., and L. Grilli. (2006). The influence of childbearing regional contexts on ideal family size in Europe. Population 61(1-2), 109-138.

Lutz, W., V. Skirbekk, M. R. Testa (2007) New Empirical Evidence on The Low Fertility Trap Hypothesis PAA 2007

Canada and the USA: Demographically Different?

Guest Post by Scott Peterson


According to PRB.org's 2006 World Population Data Sheet Canada's population as of mid-2006 was 32.6 million while that of the USA was 299.1 million. The same document shows that the rate of natural increase in population for the two countries is 0.3 percent per year for Canada and 0.6 per year for the USA. So absent immigration the USA is expected to increase its population twice as fast as Canada on a percentage basis alone. When you take into account the base population number, we should expect to see Canada's population increase absent immigration by 97,800 persons whereas with the same criteria the US population should increase by 1,794,600 persons. A figure which is 18 times greater than the Canadian increase.

As per the PRB report Canada's net migration is 7 persons per 100,000 while the US number is 3 persons per 1,000. Again, when one takes into account the relative base populations that translates into expected in-migration for Canada of 228,000 persons versus expected in-migration for the US of 897,300 persons. The ratio in favor of the US is a shade under 4 to 1.

Finally, when we take a look at PRB's projections for the two countries' populations for the year 2025, Canada's is expected to be 37.6 million persons while the USA's population is expected to by 349.4 million persons. That translates to an increase in the US population of 50.3 million persons versus an increase in the Canadian population of 5.0 million persons. Remarkably, the US will increase in population to 2025 by significantly more than the entire population of Canada today! Plus, the total increase for the USA is expected to be 10 times that of Canada!


The answer to the title of this post is that one can categorically state that Canada and the US have radically different demographic situations. What then, are the implications of this difference? I suspect that Canadians who are aware of these facts must be somewhat uneasy about the relationship between Canada and the US. Living next to a country that dwarfs yours by most criteria means that a careful balance in relations must be managed. On the other hand, US growth represents export opportunities for Canadian businesses and Canadian economic policy ought to steer toward export-oriented industries. Of course, just about every other country in the world is dependent on exports to the US for economic growth, so this could be problematic for Canada.


One remaining set of facts from the PRB report concerns the geographical size of the two countries; Canada at an area of 3,849,670 square miles is larger than the USA at 3,717,796 square miles. If immigrants were seeking land, it would seem that Canada would be the place to go, but the global trend toward urbanization negates this seeming advantage to Canada. I believe climatic factors weigh against Canada when it comes to where immigrants choose to seek a new country, as well. It seems that systems for managing heat are preferred to systems for managing cold as the growth of southern-tier US states has been radically higher than any other part of the US or any Canadian province.

Fertility in China

Claus mailed me this morning with a link to this article from the BBC:

China's top family planning body has warned of a "population rebound" as couples flout one child policy rules. The widening wealth gap could lead to a rise in birth rates, Zhang Weiqing, from the National Population and Family Planning Commission, told state media. Newly rich couples can afford to pay fines to have more than one child, while rural couples are marrying earlier, he told Xinhua news agency.

As Claus indicated to me in his mail all of this is something of an oversimplification:

Of course China is a damn difficult case to get a hold on and also instead of talking about population growth we should at least also talk ageing too. In terms of fertility what are we looking at? The general consensus says that TFR often is underreported ( i.e. the recent consensus from 01-05) produced an average of about 1.3. But then again, the government figure of 1.8 is clearly too high. So we are perhaps looking at an overall TFR (over a year period 1997-2007) at about 1.4-1.6.

Now, in China I would expect the rural-urban division to be very important. And really the BBC focus on 'newly rich' couples does not seem be representative of the general trend although of course it is difficult to say for sure. This is of course also where overpopulation comes in since when we have rapid urbanization this will become an issue, especially in China although of course the cranes are working fast to counter this. Now, the TFR estimates of urban TFR are very low indeed and this begs the question, just how important is the following observation in the general picture ...

In fact, last month, a survey by the National Population and Family Planning Commission found that the number of rich people and celebrities having more than one child was on a rapid increase, and nearly 10% of people in this category had three children.


In fact I had a post a couple of months back about the re-affirmation of the one child policy in China which struck me as being a fairly important and significant development, especially in the light of what we now understand about the impact of sustained low fertility on the shape of the population pyramid.

As Claus says the rural-urban division seems to be important here, but really if the rural areas still have somewhat higher fertility at the present time then this can only be expected to drop as rural China develops and a more systematic form of "law and order" arrives. The key thing about China I think (as I say in the previous post) is the fact that they have just re-asserted the one child policy, in other words there is a legal framework in which it is going to be difficult for urban couples to raise their fertility to any significant extent as incomes and possibilities rise.

Some reflection of this underlying reality can be seen from the content of this paper presented at PAA2007, the abstract of which I reproduce below:

This paper presents preliminary results from a field survey on fertility preference and behavior among six counties in one of the most dynamic regions of China (Jiangsu province) with one of the lowest fertility levels (TFR at 1.0). The survey, to be completed in January 2007, will be the first of a longitudinal study planned for this research site. This paper will be the first to report on a new study designed to understand below-replacement fertility in the context of economic and social globalization and political intervention. Some results from the study will have special relevance for China, given its unique government intervention and control in reproduction, but many of the results should have broad implications for understanding global low fertility, with China being one of the most dynamic players in the new wave of globalization.

The paper suggests that the impact of the one child policy in some provinces has been so dramatic on young urban couples that even some official 'relaxation' is being contemplated. As the authors say:


With over a fifth of the world’s population, China is a newcomer but an important one in the emerging global regime of below replacement fertility. In the last decade of the twentieth century, China’s national fertility has firmly dropped to the below replacement level. China’s most recent national census obtained a national fertility level of 1.22 children per woman in the year 2000. With adjustment of underreporting, fertility level measured by the total fertility rate (TFR) is believed to be around 1.5 (Cai 2005; Guo and Chen 2007; Retherford et al. 2005; Zhang and Zhao 2006). In China’s more developed regions, fertility has been even lower for more than a decade, barely above the one child per couple level. China, however, is often conspicuously missing in the literature on below replacement fertility.

As the researchers also indicate, Jiangsu province is a very interesting case due to the long duration (nearly two and half decades) of a province-wide one-child policy there. This means that children from the "one-child-per-family" generation are now approaching reproductive age and thus the question of finding some sort of exit strategy from "population meltdown" starts to be posed:

We chose Jiangsu not only for its economy, to study the role of globalization, but also for its demography -- its extremely low fertility and unique fertility policy -- to study the role of policy intervention. Jiangsu is one of only two provinces (along with Sichuan province) that implemented a province-wide one-child policy for the past two and half decades, requiring not only urban but also rural couples to have only one child. Its recorded fertility level from China's 2000 census is also among the very lowest: a TFR of 1.0. Jiangsu province's strict birth control policy also contains a benign side for couples in this province. As a measure of policy transition to phase out the one-child policy after one generation, provincial birth control regulations allow newly married couples to have two children if one of the marriage partners is a single child her or himself in rural areas and if both marriage partners are single child in urban areas. With two and half decades of the one-child policy, couples qualifying for having two children are now entering their marriage and childbearing age. These couples are our main study targets.

Obviously and by the very nature of the lengthy timescale across which demographic processes work the results of this interesting piece of research won't really be available for many years to come. In the meantime the rather more pressing question of whether all of this is not a case of far too little far too late really does present itself. The Chinese still seem obsessed with the SIZE of their population and not with its structure, and this seems to me to be a big mistake, and one of global proportions given its very rapid economic growth rate (interestingly China's economy seems to have accelerated slightly rather than slowing of late). The big, and much needed, sea change in Chinese thinking will only come when people inside the decision making process there start to realise that it isn't so much size that matters as population structure, as this very useful and interesting power point presentation on China's demographic structure (thanks Claus) makes only too clear.

Finally returning to Claus's last point (and the BBC's main one) the "rich" are by definition only a small proportion of the total population, and if only 10% of this group have extra children it is clear that this in itself will not have much in the way of a statistical impact on overall fertility in China.