Friday, January 26, 2007

Peter Drucker on Demography

Could microeconomics help us out?

I'm new here, so I think it's good to start by writing about what awoke me personally to the issue of ageing populations. About pension bombs and dependency ratios I had heard before, but it took one course book, about three years ago, to realise that there's much more involved than that. In fact, the book I read gave it only one chapter -but it was written by Peter Drucker, and he can be quite convincing. (In this one, the Mediterranean reality, for example, is described as that of "collective national suicides".)

Drucker himself (who died in November 2005) lived a long life too, a week short of 96 years, and during his lifetime he provided a good deal in the way of of visions and predictions; and with those he had an uncanny habit of being usually right. His last vision was something he called the Next Society, a kind of synthesis of three great changes -the rise of knowledge workers, the disapperance of organisational hierarchies, and the cataclysm of demographies. The Economist summed it up in a survey in 2001 (unfortunately for subscribers only) and basing myself on that survey, and the book I mentioned, I'll now try to explain why demography mattered to Peter Drucker.

Firstly, politics in many old democracies will become a mess:

winning the support of older people will become a political imperative in every developed country. Pensions have already become a regular election issue. There is also a growing debate about the desirability of immigration to maintain the population and workforce. Together these two issues are transforming the political landscape in every developed country.

In the book Drucker goes as far as predicting that, due to the new imperative, we can kiss goodbye to strong governments and their normal 4-year lifespans; instability will become a norm. There's no political system that is prepared to absorb the intergenerational conflict of interests as a major issue. On the contrary, there are some electorates that haven't so far even digested this contemporary version of the political compass -I just can't help thinking of Italians and their dilemma of how to be liberal without being a communist- so it'll be quite a chaos in 2020.

As for the (partial) resolution of the conflict -immigration, that is- Drucker stresses that the traditional migrant havens of USA, Canada and Australia will have a head start over Europe and Japan. And indeed, Europeans have been rather good at making a fuss already of their current foreign populations so how on Earth are they going to handle it on a much larger scale?

Secondly, the nature of labour will also change dramatically:

In future there will almost certainly be two distinct workforces, broadly made up of the under-50s and the over-50s respectively.

The younger group will need a steady income from a permanent job, or at least a succession of full-time jobs. The rapidly growing older group will have much more choice, and will be able to combine traditional jobs, non-conventional jobs and leisure in whatever proportion suits them best.

It's not certainly breaking news to anybody following this blog, but as people live longer they must be expected also to work longer. And this calls, naturally, for more flexibility -from employers, governments and trade unions. According to Drucker, companies that are fast enough to attract retiring knowledge workers by tailored, part-time, or part-year, contracts will gain a huge advantage over their competitors. Most people will opt for two careers; working first their conventional full-time one, and later the second one as a freelancer.

Governments, then, will have to moderate falling participation rates by well-targeted tax breaks (since I don't believe that they'll be able to reform their pension systems much further, within the new political climate) and trade unions must deal with the idea that tomorrow's employees can differ greatly in their interests and preferences. (Well, to this Drucker would probably remind us of how the knowledge worker has already made the traditional unions structurally obsolete.)

This is also interesting:

The split into two workforces is likely to start with female knowledge technologists. A nurse, a computer technologist or a paralegal can take 15 years out to look after her children and then return to full-time work. Women, who now outnumber men in American higher education, increasingly look for work in the new knowledge technologies. Such jobs are the first in human history to be well adapted to the special needs of women as childbearers, and to their increasing longevity.

Pro-natal HRM, anyone?

Thirdly, the markets will diverge too:

The bubble market of the 1990s, with its frantic day-trading in high-tech stocks, belonged mainly to the under-45s. But the customers in the markets for investments, such as mutual funds or deferred annuities, tend to be over 50, and that market has also been growing apace. The fastest-growing industry in any developed country may turn out to be the continuing education of already well-educated adults, which is based on values that are all but incompatible with those of the youth culture.

But it is also conceivable that some youth markets will become exceedingly lucrative. In the coastal cities of China, where the government was able to enforce its one-child policy, middle-class families are now reported to spend more on their one child than earlier middle-class families spent on their four or five children together.
But this new luxury youth market is quite different from the homogeneous mass market of the past 50 years.

So the mass markets of all sorts, and the old market positions of firms therewith, will fade away; ageing populations aren't challenging only public finances and political systems around the world, but their impact to business strategies is also something unique. And it is this micro side of the economics of ageing, that I'd like to emphasise here.

Whereas the fiscal troubles, and maybe the limits to productivity growth (as people can't adapt new skills that easily when they grow older), are something inevitable, I wouldn't say absolutely the same about the demand constraint -as such, one matter that I hadn't taken into account at all prior to bumping into this site, by the way. Although I find it realistic to presume that older consumers tend to save more and spend less, I believe that it is the least determining of those factors. And if it doesn't determine, it can be overcome.

What about if it's the companies that have been simply incapable of meeting the preferences of the senior consumer? And if so, then what is it that the senior consumer prefers?

I'm only guessing, but I'd point to the emergence of the services sector. If you're old(ish) and if you have your career behind, you probably have both time and money -and maybe it's value for time that you're now after? Drucker gave those educational services, and lifelong learning, as an example. It might be one part of the answer, and now we only need the others.

So, would someone please like to tell us: what do the old people want?


Dave Barnes said...

Old people want to be young physically with the knowledge from being old

Anonymous said...

What old(ish) people want?
(1) health care
(2) tourism
(3) grandchildren

I dont think elderly people wants education. I have never seen that except in kollelim (Jewish religious study groups).

Re grandchildren, even if there is one grandchildren for 4 - 6 grandparents (and granduncles), the amount of worry and money dedicated to their welfare is only growing. Grandparents spend more on one grandchild than in two or three.

Aapo said...

As it's likely to be the service sector on which the elder consumers are likely to spend their money, I wonder whether the culture is gonna play any role in it.

For example one thing that is typical of my people, Finns, is their reluctance to pay for services. Men are supposed to fix and repair everything themselves, and the same goes for women and housework; hiring extra hands is still surprisingly often regarded as a sign of 'a housemaid society' -as if something incompatible with the Nordic ideal.

As well, if the government is there to provide a big share of the welfare services it may seriously hold back the development and innovations within those markets.

At least here it's difficult to say anything about this without making it sound ideological and biased, but at least in my opinion these kind of social perceptions can undermine things to quite an extent.

Scott said...

I see France being better able to absorb immigrants than most other EU countries. It seems to me that French citizenship laws and the country's colonial history have created a culture which could absorb more multi-ethnic immigration and therefore France seems more likely to be able to maintain its labor pool.

Germany's citizenship law and culture seem much less conducive to attracting immigration of any ethnicity. So I see Germany having a much more serious labor force problem than France.