Question

Why do most population projections neglect the potential for economic forces to shape demography?

Answer 1

Greetings for the day,

Demographic Implications for Economic Growth:

The expected slowdown in population growth and labour force participation rates will have implications for long-run economic growth and the composition of growth. First, we will discuss the key determinants for the economy’s longer-run growth rate are labour force growth and structural productivity growth it means, how effectively the economy combines its labour and capital inputs to create output because we have a scarcity of resources. Demographics suggest that labour force growth will be considerably slower than it has been in recent decades, and this will weigh on long-run economic growth.

In addition to affecting the economy’s trend growth rate, demographics will likely affect the composition of growth by shaping aggregate consumption, saving, and investment decisions these are the three main important decision on which the complete economy is based. Increased longevity means that people will need to save more over their working life to fund a longer retirement period so that they can spend their income in future but that leads to the reduction of money into the market. This is especially true given the degree of underfunding of public pension plans at the state and federal levels. Demand for healthcare will continue to rise, and an ageing population will place different demands on the housing sector than a younger population, affecting the demand for single- versus multi-family properties, for owning versus renting, and for residential improvements that allow older adults to age in place.

Population projections are widely used in various policy-making processes. Demographic forecasts have created awareness of population ageing and resulted in changes in pension, health care, and other public policies throughout the world. Demographic projections are indispensable in the design and implementation of spatial (e.g. urban and housing) policies. In other domains, the role of projections varies.

Demographic projections are always uncertain and erroneous projections can lead to misleading or even wrong policy decisions that may cause all kind of losses. Research has increased understanding of demographic processes but unfortunately, this has not improved forecast accuracy. Therefore, good policies should be robust against a wide range of demographic futures.

So as a conclusion we can say, demographic change will result in a slower-growing of the economy and older population. This transition will likely put downward pressure on the growth rate of potential output, the natural rate of unemployment, and the long-term equilibrium interest rate. The magnitude of these effects and the timing are uncertain because they depend on complicated dynamics and the behaviour of consumers and businesses. Demographic change may also affect the business cycle and the monetary policy transmission mechanism because of the focuses on more saving just to secure their retirement period. Monetary policymakers will need to continually evaluate these structural and cyclical effects in determining appropriate policy. Demographic trends present challenges for fiscal policymakers as well. Rising fiscal imbalances are projected to lead to higher government debt-to-GDP levels, potentially putting upward pressure on interest rates, and crowding out productive investment. But steps can be taken to offset some of the negative consequences of demographic change for the economy. These include policies that focus on increasing productivity and labour force growth and that address growing fiscal imbalances.