Only in recent years has the economic impact of declining populations begun to be seriously discussed. Japan, whose population peaked in 2008, was a forerunner, but many other countries have since joined it: there are, according to the un, 63 countries with shrinking populations, accounting for 28% of all people alive in 2024. These include China, Germany, Russia and South Korea.
The central question is whether falling populations should worry us. Martin Wolf argues in the Financial Times that there is “no powerful reason” to fear them. “The sort of collapse heralded by fertility rates below one would indeed be problematic,” he writes. “But a fertility rate [the average number of children per woman] of 1.5 or above should be perfectly workable, with a little sensible forethought.” Arguments of this kind are common.
To assess the validity of this relatively sanguine view, it is necessary to address two fundamental questions. First, is it reasonable to expect productivity growth to accelerate or even to stay constant? Second, is the fertility-rate “comfort level” stable across countries and over time?
On the first question, the view rests on the logic that the adverse impact of a shrinking workforce on output can be offset by demography-induced technological progress, most notably in ai and robotics—or at least that productivity growth, which determines per-person income growth, can stay constant. This is an orthodox economic argument. I myself held that view as a young economist in the 1980s when the issue was starting to be debated in Japan.
My growing question—grounded in long-term observation of Japan’s economic and social evolution—is whether an acceleration in productivity growth, or even the status quo, is feasible as a population falls rapidly.
One reason for my doubts is the effect of the “grey-hair democracy”. Older voters naturally prefer government spending that benefits them—such as social-welfare programmes—over spending on basic research or higher education, whose positive effects on growth take much longer to materialise.
Second, ageing tends to slow the pace at which society adopts new technology. Constantly confronted with new digital devices and new ways of doing things, older people face greater technical and psychological challenges than the young. Age-related differences in the speed of technology adoption can produce big cross-country differences in productivity growth.
Third, the uneven speed of population decline across regions is weighing on productivity. A minimum level of infrastructure spending must be maintained even in areas that are losing population. The fewer people remain, the more expensive this becomes, eating into productivity. Economy-wide productivity is strongly influenced by the speed at which people and capital shift from shrinking regions to expanding ones. Deep attachment to one’s birthplace and long-term residence constrains such mobility.
How about the question of whether a comfort level for the fertility rate—such as 1.5—is broadly stable? Here, it is worth recalling how actual fertility rates have evolved in low-fertility countries. In 1990 Japan’s rate was 1.54 and South Korea’s 1.57. Today they stand at 1.15 and 0.75, respectively. Both countries were above the comfort level as recently as 30 years ago. Factor in the mechanisms that gradually depress the fertility rate, and the very notion of a comfort level becomes illusory.
Declining fertility, though a global phenomenon, is notably more pronounced in East Asia. This suggests the need to explore country- or region-specific factors that run alongside globally common ones. One such factor is the “marriage penalty” or “motherhood penalty”, the reduction in lifetime income resulting from interruptions to a woman’s career. Demographic studies point to a positive correlation between fertility rates and husbands’ participation in housework and child care: both are relatively high in Nordic countries, and relatively low in Japan and South Korea.
Claudia Goldin, an economic historian, links the decline in fertility rates to the speed of economic growth. “Men benefit more from maintaining traditions; women benefit more from eschewing them” and seeking greater autonomy, she wrote in a recent paper. This mismatch widens when the economy grows quickly, which can depress fertility. Is a structural mechanism that pushes fertility downwards embedded in society? If so, the resulting feedback loop, though slow, can be a problem. Social norms depress fertility, and the ensuing societal changes—an accepted new normal for the number of babies—force it even lower.
The social norm is probably best reflected in employment practice. Many large Japanese firms long operated under the so-called lifetime or long-term employment system. In the late 1990s, facing existential threats following the bursting of a credit bubble, they became more reliant on workers on part-time, temporary or fixed-term contracts, who typically receive lower pay and fewer benefits than regular employees.
The consequences were serious: far fewer people got married. In 2020, 28% of Japanese men aged 50 had never married, up from just 3% in 1980. In Japan, unlike in Western countries, births outside marriage are extremely rare. The decline in the birth rate has therefore been driven mainly by the rise in the number of unmarried individuals, rather than by married couples having fewer children. That is why Japan did not witness a third baby boom when the “second baby-boomers”—the children of the generation born between 1946 and 1949—reached marriageable age.
A comfort level for the fertility rate may or may not exist. Either way, “sensible forethought” is crucial. It must be grounded in analysis incorporating the complex interlinkages among demographics, society and the economy.
The hardest part of “sensible forethought” is how to win support from the elderly. Consider the problem that fewer children naturally means fewer grandchildren. Some 13% of Japanese women born in 1935 had no grandchildren. The projected figure for those born in 2000 is 45%. Older people naturally prefer to be well treated in social-welfare programmes, yet they also care about the financial burden placed on future generations. People, in other words, are both egoistic and altruistic. Yet, with weakening ties to future generations, older voters are becoming less inclined to support long-term solutions—and happier to put up with fiscal deficits that weigh on those future generations. As the low birth rate persists, the balance between egoism and altruism in society may shift. Navigating that change will require good sense and forethought in equal measure.
Shirakawa Masaaki was governor of the Bank of Japan from 2008 to 2013.