The Nature of the Fertility Trap?

We have certainly been devoting some time here recently on DM to the discussion of the potential drivers of any possible fertility trap which may arise as the TFR of a country drifts below the 1.5 threshold. As a derivative of that debate the discussion also briefly moved over to Alpha.Sources where also the author of the Ape Man blog contributed extensively. Indeed, Ape Man* got so interested that he wrote a large essay in response to my and Edward's musings on the potential drivers of any possible fertility trap. Below Demography Matters would like to present a large extract from this essay. This is being presented here at DM in the form of a guest post, and we do this in the spirit of our emphasis on open debate and the exchange of ideas.

Ape Man has taken the trouble to try and argue against a view that Edward and I have been presenting: namely that societies as they age will increasingly pass through a stage where they become export dependent. Since most commentators seem simply to ignore this issue, an attempt to prove the idea wrong is certainly a welcome contribution to the debate. This, at least, is progress.

Does an aging demographic structure lead to an export-oriented economy?

By Ape Man

As part of their work on the Fertility Trap Hypothesis, Edward Hugh and Claus Vistesen argue that an aging demographic profile will lead to an export-oriented economy . More controversially (at least to me), they argue that a move towards an export economy will make it hard to raise birth rates to replacement levels. They think that the process of moving towards an export-based economy will put pressure on wages of young people which in turn will make them less likely to have children.

Mr. Hugh and Mr. Vistesen's argument revolves around the Life Cycle Model of consumption and savings. The special twist that Mr. Hugh and Mr. Vistesen bring to the idea of the Life Cycle Model is that it can explain things on a macro level based on the demographic profile of the country in question.

Now there are many ideas in the Fertility Trap Hypothesis that I think are quite strong and likely to hold up across all cultures. But I don't think that Hugh and Vistesen's work with the Life Cycle Model will be one of the successful ideas. I see no reason to think that fertility will be negatively affected even if savings/consumption behaves as the Life Cycle model says that they will. In other words, even if the Life Cycle Model holds true across all cultures (a big if, that), the economic effects that will result are not part of the "Fertility Trap."

It's a little bit cheeky for me to say all that. After all, Mr. Hugh is macroeconomist with many years of study. And though Claus Vistesen is still a student, he has done far more studying on this matter than I have. By comparison, my background as an ignorant hillbilly means that my credentials are a little thin for tackling such issues as the Life Cycle Model of consumption and savings and how it relates to demographic age structures on a macro scale.

But Mr. Hugh's response to a comment I made over at Vistesen's blog has stirred up my thinking on the issue. So in between trying to get over sinus issues (otherwise known as the common cold, apeman style), trying to fix my truck, and trying contribute my fair share towards getting a garden in, I have been pondering Mr. Hugh's and Mr. Vistesen's idea.

(...)

So what is my problem with Hugh and Vistesen's idea? It seems so far our little thought experiments have supported their contention that an export-oriented economy is a natural feature of an aging demographic. But that is only half of Hugh and Vistesen's idea. The other half of their idea is that this process would lead to lower wages for young people and thus discourage them from having children. The idea is that this process is self-reinforcing. This is why they want to add it to The Fertility Trap Hypothesis.

This is where I get lost. No matter how I run my little nomad model and no matter what other models I try to create, I simply can not understand why this process should lead to lower incomes for young people. In fact, most of my thought experiments seem to indicate that if any thing, wages for young people should rise.

Now, that is not to say that I can't see other ways that an unbalanced demographic would put downward pressure on wages for young people. Higher health care costs associated with an aging demographic and a universal health care system would be one such example. In that system, cost would be spread over all the workers, but the benefits would be going primarily to the elderly. The effect of this would be to depress the wages of young people relative to wages of previous generations of young people.

But Hugh seems to think that the changing mix of consumption and investment associated with an aging demographic would negatively affect young people. He says….

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.

In a different post Vistesen says…

And this dear readers is where demographics come in and more specifically why we need to look at the population structure of for example Germany and Italy in order to really understand what is going on before our eyes. Why for example is consumer spending persistently low in these two countries and why is Germany running a trade surplus of 6% of GDP.

The common theme in Vistesen's and Hugh's argument seems to be that an ageing demographic will consume less as a percentage of their income and thus younger people will have less job opportunities. But as far as I can puzzle it out, even if you grant their premise, their conclusion does not follow.

Let us go back to my nomad model for a bit. If my little nomad group ships out sheep in return for promises of future support, that is going to reduce the amount of lambs that they are going to get in the coming spring. Less sheep=less lambs.

But this is not necessarily a loss. If you have more sheep than you can efficiently take care of (which is why they want to send sheep away, remember?) then you might have less lambs the following spring anyway. Thus you might not necessarily be losing lambs by sending sheep away.

Now I think that this applies pretty well to a modern economy. All other things being equal, those nations that export capital are going to have a slower growth rate than those who import it. True, you expect to get a return on that exported capital. But in the short term, that return is only a fraction of what you paid out (i.e if you get a 7% return on your money, it is going to be a while before you get your hundred dollars back).

Thus I can accept nations that run trade surpluses will have slower GDP growth than those that don't (all other things being equal). And I accept that slower GDP growth means less job creation (all other things being equal). But how is this a problem for a demographically challenged society?

The problem that leads a demographically challenged society to export capital is that they don't have very many young people. That means they don't need to create very many jobs. But that does not mean that the jobs that they do create pay less. In fact, given that young people have a competitive advantage at many tasks, one would think that a shortage of young people would actually cause their wages to rise. (Granted, older people have a competitive advantage at many tasks as well. But there would be an abundance of them.)

In short, domestic consumption does not have to be as robust in order to provide sufficient employment for the younger cohort in a demographically unbalanced economy.

Hugh argues that trade puts pressure on wages. So, by his reasoning, when you work in exports, your paycheck is always under pressure. I am skeptical of this line of reasoning, but even if it is true that working in exports puts pressure on wages (which does not seem to be the case from what I have read), this is not really an issue related to demographic saving patterns. One would expect that if people in other countries could make something cheaper that it would affect the wages of young people regardless of whether the demographic profile was aging or not.

Hugh and Vistesen's strongest point in their favor is the real world data showing that incomes for younger people have dropped when compared to their parents at a similar age. But this is very misleading data.

The proper data for Hugh and Vistesen to base their claim on would be to compare the total cost to the employer of each hour worked by the younger generation and the older generation at a similar age. I strongly suspect that with the rise in pension costs, health care costs, increased labor regulations, and greater vacation time, that you will find that young people around the world are costing their employers more than their parents did at a similar age. I suspect that this would hold true in Japan and Europe in particular.

To be sure, this does not take away from the fact that young peoples' wages are dropping. And the fact that their wages are dropping could very well be a contributing factor in the lowering of fertility rates. But if young people are costing their employers more than their parents did at a similar age, then I think that you can hardly blame an export-oriented economy for putting pressure on their wages. Instead you must look to those things that are causing their labor to be so much more expensive than their parents at a similar age.

The long and the short of this is that I can see an aging demographic profile leading to a trade surplus. But I don't see this as being something that contributes to "The Fertility Trap." Rather I see it as the last hope of many countries to get out of the "The Fertility Trap." And as the world ages, that last hope is going to fade fast.

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*(Mind you, Edward and I are referred to as Mr. Hugh and Mr. Vistesen which of course makes the identity of Ape Man somewhat off in comparison, but that is nevertheless the name our friend here goes by in the blogsphere, and as such we naturally respect his wishes. Maybe it is just coincidence, but isn't there some relation somewhere between Bonobos and our earliest ancestors.)