Tuesday, June 19, 2007

Economics and Low Fertility, Some Stylised Facts

The Economist has an informative and interesting (if somewhat complacent) article on European fertility this week, and I have a pretty lengthy post on A Fistful of Euros which goes through the main issues raised.

There seem to be two central points here is

a) that there is no such thing as "European Fertility", but rather there are various patterns (the Economist divides Europe in two, I try to be a bit more subtle, and distinguish between four groups of countries)

b) that low European fertility cannot be looked at in isolation, since it forms part of what is effectively a global phenomenon, as birthrates steadily drop in country after country across the planet. The situation in China after many years on a one child policy is by now well known, as is the situation which prevails in Japan. Less well known perhaps is that several states in Southern Indian are now with below replacement fertility (and apparently heading down to the lowest-low bracket) as is, for example, Thailand.

Before going any further I would like to stress yet one more time that I am NOT a demographer, but a macroeconomist, a macroeconomist who has simply become interested in demographic processes due to their evident interface with economics.

Now in this brief post I want to address what Europe has in common with what is happening elsewhere, knowing full well that in each and every case there are also "country specific" features.

Various explanations for the generalised below-replacement phenomenon have been offered, some of them social and some economic. Undoubtedly there are a number of factors at work, but for present purposes I want to highlight two points:

i) In some form or another the fertility decline is associated with the process of economic development (one immediately might think here of Becker's child investment thesis, and the substitution of quality for quantity), and in particular what are termed the lowest-low levels of fertility (TFRs below 1.3) seem to be associated with very rapid rates of economic development (the Asian tigers and southern Europe might be considered good examples here). Since the big economic news since the late 90s has been the very rapid economic growth which is taking place in a large wedge of emerging economies, there would seem to be prima facie grounds for fearing that this lowest low fertility level may arrive in an increasing number of countries, and comparatively soon.

ii) The growing disconnect between those countries who fall below replacement level, but then steadily recover ground - typical cases here would be the US, France, the UK, Ireland, and Scandinavia generally (these could be increasingly considered the "outlier", special-case countries, although of course they themselves are a pretty heterogeneous bunch) - and the "other group" (ie the increasingly "path normal" countries) where fertility falls below the (apparently) critical TFR 1.5 level, and then subsequently fails to break upwards again.

Why this latter process of trawling the bottom is the case is in fact the big headache we all face. The persistence of this below 1.5 TFR phenomenon has lead the Austrian demographer Wolfgang Lutz to formulate a low fertility trap hypothesis (LFTH). The first point to make would be that this trap idea is simply a hypothesis awaiting confirmation at this point. Lutz identifies three mechanisms which might be operating in perpetuating the trap:

a) Negative population momentum
b) Ideational factors
c) Economic processes

On the negative momentum situation, one Japanese newspaper recently made the following point:

".... In the future, there is expected to be a phenomenon in which the number of births declines but the birthrate rises. Because of this, some experts say the number of births is a more appropriate measure than the birthrate for evaluating government policies and for setting targets".

Well, this is negative momentum at work. After decades of below replacement fertility the cohort base is continuously reduced and as a result fewer and fewer children arrive (as shown in this recent post on Germany) regardless of anything other than very sizable (and pretty much inconceivable) movements in the fertility rate. It is hard to overstate the corrosive impact of this process on the population pyramid in the longer term.

This momentum factor on its own does not, however, generate a fertility trap, since it does not affect "fertility" directly. However, it may be a factor which has an indirect impact via the processes characterised as (b) and (c).

(b) Ideational mechanisms: the idea here is simply that in an environment where very few children are actually being born, the woman's idea of "ideal family size" may change. Thus the negative population momentum which produces comparatively few children may impact in this way. The phenomenon being referred to in some Japanese media as "parasite single women who adamantly refuse to marry and bear children" may indeed be one example of this process at work (remember, the two child family is in many countries a very recent phenomenon, and with rather few deep social roots), but if indeed something like this does exist in Japan it is only a culturally specific example of a more general process. Around 25% of German women now remain permanently childless.

Economic mechanisms: Well one example of this would be the impact of structural reforms on seniority bonuses in Japan:

"As age-wage curves flattened in Japan, women can no longer marry to become full-time housewives, as in general their husbands' salaries aren't going to rise enough to make for a comfortable living."

I think a long and pretty obvious list of similar economic determinants which influence fertility decisions could easily be drawn up. For the LFTH to work, however, these need to contain an element of circularity (ie they need to be economic processes which are in part driven by ageing and low fertility in the first place), and I think it is not sufficient to draw attention to a phenomenon with a general impact like globalisation.

My own work as a macroeconomist in part relates to this, and I have been pretty focused of late on internal imbalances in the eurozone, and what (if any) relation these may have with differential rates of population ageing as between countries (and, thus, by implication, differential fertility, since those who are ageing most rapidly are those whose fertility continues stubbornly to remain below the TFR 1.5 level).

I think, if we look at the three most "elderly" societies in terms of median age - Japan, Germany and Italy - we can now begin to discern certain "stylised facts":

a) Ongoing weaknesses in domestic consumer demand
b) absence of housing booms (since 1995 in the European cases)
c) Comparatively high rates of personal saving, which then begin to decline
b) Increasing structural dependence on exports for growth
c) Lack of attractiveness as a destination for migrants
d) An increasingly flat wages curve (across time) despite demographically driven labour market tightening
e) Growing government deficit issues and dilemma's about how to fund
health and pension systems, with a tendency to try and load the cost onto the tax system rather than reducing provision.

Now it is evident that there is some variance between countries in the level of "fit" here. Italy for example, has experienced very low economic growth (even during the recent global spurt) precisely because it has (for political gridlock reasons) been unable to make the kind of reforms we have seen in Germany and Japan, and thus has been able to achieve export lead growth. Unfortunately this is bad, rather than good news for Italy. Likewise Italy has been receiving rather more migrants of late than in the past, but at the same time has been having a large human capital deficit on the migrant flows, since the Italian economy simply is not able at this point to generate the kinds of employment which many educated young Italians need, and hence as unskilled migrants enter educated Italians leave. (This has also been happening to some extent in Germany, and I would be very interested if anyone had information on this vis-a-vis Japan).

The main point about the above list - were future data to confirm these trends - is that (as a complex) they all tend to reinforce birth postponement decisions via their impact on the economic well-being of young people. This is especially true of (e), where young people are, via the tax and contributory systems having a growing burden placed on their shoulders. This tendency could become even more pronounced as a majority of voters come to be over 50.


J said...

Germany, Italy, Japan are immigration magnets.

Edward Hugh said...

"Germany, Italy, Japan are immigration magnets."

Not really I'm afraid. Japan has had very little inward migration. Germany's migration history is more complex, since there were "migration spurts" from Turkey in the late 1970s and 1980s, and there has been a drift of a population of German descent from East Europe into Germany in the 1990s. Nowadays however more or less as many people leave each year as enter (Japan is similar in this sense).

Italy has historically received very few migrants. In the early years of this century Italy has received some migrants, but the striking thing is that proportionately this is a lot less than might have been expected given the rapid ageing that is taking place there, and does not match proportionately the EU migrant receiving countries like Sweden, the Uk, Ireland, Spain and Greece, despite a tightening labour market and a growing number of people leaving work to retire.

The south of Italy is particularly badly affected, since the proportion of migrants it receives is very small, and the workforce is now falling significantly year on year.

Claus and I are doing some work on the role of construction in economic growth, relating this to population median ages and migrant flows. The last post on the US situation gives some indication of how this may all work.

Migrants follow work, and work is only created in large quantities in economies that grow significantly on a sustained basis. With the shift from an industrial to a services economy construction jobs and the financial services sector which accompanies construction seem to play a critical role.

Japan's last housing "boom" ended in 1992, German property has never really recovered from the construction boom that accompanied unification in 1995. The Italian property market also has not been especially strong (in house price increase terms) since the housing boom of the mid ninetees there. You can find all of this argued in detail for the Italian case (and with extensive data) in this post here.

So basically - all other things being equal as the say - what determines whether a country has a housing boom and thus heavy inward migrant flows? The answer, I would argue is relatively simple: population median age.

Randy McDonald said...

I'd also argue that cultural links equally play an important role. Germany and Japan have both exhausted the migration potential of their diasporas, while Italy arguably never had much of one to begin with. Britain, France, and Spain all play relatively central roles in post-colonial networks with countries which share numerous traits in common with these three.

CV said...

Hi Randy,

I think your point is very important to get on the table. Perhaps the same thing is in play with Russia which is also receiving a large relative share of the immigration from the CIS and Eastern Europe ... although not nearly enough to halt the demographic demise.

Randy McDonald said...


"I think your point is very important to get on the table. Perhaps the same thing is in play with Russia which is also receiving a large relative share of the immigration from the CIS and Eastern Europe ... although not nearly enough to halt the demographic demise."

Immigration flows into Russia certainly reflect Soviet-era links and migration patterns--immigration flow to Russia was cited in Kyrgyzstan as a reason to keep Russian as an official language, I believe.