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The “Aging Crisis” Is Actually Just a Labor Crisis for the Wealthy

A smaller labor market means fewer people willing to take on low-paying jobs.

A senior warehouse worker loads boxes from a pallet truck.

The New York Times told us last week that China is running out of people. That might seem an odd concern for a country with a population of more than 1.4 billion, but you can read it for yourself:

“Driving this regression in women’s status is a looming aging crisis, and the relaxing of the draconian ‘one-child’ birth restrictions that contributed to the graying population. The Communist Party now wants to try to stimulate a baby boom.”

What exactly is supposed to be China’s “aging crisis?” China has had a low birth rate for the last four decades, as the government consciously tried to slow the country’s population growth. As a result, it does have an aging population and a declining ratio of workers to retirees, but this raises the obvious question, “So what?”

We see endless news articles and columns implying that the prospect of a declining number of workers supporting a growing population of retirees is some sort of crisis. The people making such assertions really need some knowledge of demographics.

The United States and other wealthy countries have been seeing drops in the ratio of workers to retirees for many decades. In the U.S. case, we went from having 5.1 workers for every Social Security retiree in 1960 to just 2.8 workers for each retiree today.

We pay higher taxes for Social Security and Medicare today than we did in 1960 (Medicare did not yet exist), but few would say that current tax rates are a crisis. If China has to see equivalent increases in taxes in the next decade or two to support its retirees, it is hard to see it as a major problem.

Reporters and media commentators like to report on taxes as the biggest concern for working people, but as economists like to point out, the main factor determining living standards is what goes into workers’ paychecks, not what the government takes out in taxes.

The Social Security payroll tax rose by 6.4 percentage points between 1960 and 1990. The Medicare tax rose by 2.95 percentage points, for a total increase in federal payroll taxes of 9.35 percentage points.

In spite of this large increase in payroll taxes over this period, workers enjoyed considerably higher after-tax wages in 1990 than in 1960. This was true because real wages rose, especially in the first part of this period (1960 to 1973), when real wages for the typical worker rose at a 2.2 percent annual rate.

The story is even more dramatic in China. Real wages have risen just over 7.0 percent annually over the last decade. Suppose wage growth slows to 5.0 percent over the next two decades. Suppose the country has to raise taxes on workers by 20 percentage points over this period to cover the cost of its aging population. In that case, after taxes, wages would still be more than twice as high as they are today. What is the problem?

The basic story is that if an economy maintains a healthy rate of productivity growth, which allows for healthy real wage growth, then the demographic changes are a relatively small matter. This doesn’t mean that society will not face some problems in adjusting for the needs of an aging population ― the U.S. faced many problems associated with the care and education of the Baby Boomers when we were children ― but these problems are far from insoluble.

If simple arithmetic shows that the people shortage story is nonsense, then why does it continually appear in the media? The most obvious explanation is that the concerns over a smaller workforce fall into the well-known “it’s hard to get good help” problem.

This is the standard refrain of rich people, employers and major media outlets (e.g., here, here, here, here and here.) A smaller labor market could present employers with a world where workers have more bargaining power and can therefore demand wage increases that are equal to, possibly even greater than, the rate of productivity growth.

As workers move from lower-paying to higher-paying ― and therefore higher productivity ― jobs, it will be harder to get people to work at many of the lowest-paying jobs, such as domestic workers, valets in restaurants, and other jobs that primarily involve providing services to the wealthy.

That probably does look like a crisis to a small segment of the population. The wealthy may really have some cause to be concerned about the prospect of a declining population and workforce. The rest of us, not so much.

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