Population, the economy and the financial markets

2021-05-12 at 11:52 Timo Löyttyniemi

The size of the population and labour force are central to any assessment of economic development. Economic activity can be explained by population size. Incomes, consumption and savings can be explained by demographics. The strain on public finances is explained by the relative percentages of young and old people in the population. Figures are available for a wide range of purposes. Aside from the numbers, skill levels are an important part of the analysis of the economic impacts of the working-age population. Population affects a myriad of things and underlies a large number of phenomena.

One professor said recently that the current decade is a decade of the labour economists. Consideration of the anatomy and significance of work lies at the heart of economic policy. Work and the consequences of exclusion from the labour market are key issues now that we have entered the era of efficiency in the corporate context and the public sector. Inefficiency at work is disapproved of but it appears in other spheres of life, even increasingly. The welfare of a nation is closely linked to work.

World population to peak in 2064

Lancet (2020) estimates that the world population will reach its peak in 2064. By then, there will be 9.7 billion people on the planet. After that, the population will gradually fall to 8.8 billion by 2100. Considering the strain on the global environment, this could be a blessing. If population growth can be controlled, it may generate a degree of confidence in the carrying capacity of nature.

Dependency ratio weakening


The dependency ratio is falling in Europe. According to forecasts, this trend is inevitable and no reversal is in sight, unless something is done or something unexpected happens. A decreasing number of the working-age population is sustaining both the young and old. Old people deserve it and young people are something we want to have more of.

Consumer demand, savings and the stock markets

Earnings, consumption and savings can be largely explained by demography. Young and old people do not earn much, family sizes are small and so the level of consumption remains modest. Middle-aged people just under 50 are at the peak of the consumption pyramid. Savings, in turn, increase with age, at least as long as incomes are being earned. Some people try to explain the development of the stock market by combining these factors. Only few weak links have been identified because long-term developments are affected by a wide variety of factors.

A number of researchers have attempted to find a link between the stock markets and demographic trends with their models. There are researchers whose models give rise to fears that retirees sell their stocks in order to finance their consumption. This may pose a risk to the stock markets. Subsequently, the logic has been modified by the idea that people are keen to leave something for their offspring. Professor Jeremy Siegel strikes an optimistic note saying that new buyers for stocks will always emerge in growing markets, such as China and Asia.

Perhaps the clearest link exists between demographic trends and the property market. Changes in population and related migration, e.g. from rural areas to urban centres, go a long way to explain housing prices and construction. It is a global phenomenon.

Demographic change also explains interest rates. A long time ago, researchers from the OECD predicted that interest rates will fall for decades as population growth slows down. More recently, researchers from the Banque de France said the same.

Employment rates and the markets

In the United States, employment figures have a direct impact on interest rates and stock prices. Investors watch these figures closely because it is part of the Federal Reserve’s mandate to seek to maintain full employment. Employment trends provide direct information on the future pressures exerted on the FED as well as an indication of the strength of the economy to the stock markets. 

Not so in Europe. Over here employment figures are not monitored as closely as in the United States. Moreover, the figures convey different information. In Europe, where employment and the employment rate in particular are closely linked to government finances, less attention is paid to employment from the financial market point of view. However, as far as government finances are concerned, the employment rate, i.e., the percentage of the employed working-age population, is one of the key variables in terms of the sustainability of the welfare state. Consequently, employment and the employment rate tend to be used as indicators of the sustainability of the welfare society rather than a measure of economic activity.

A sustainable pension system

In Europe, pension systems are largely based on defined benefits. Promises of benefits without a fully covered funding base rest on the assumption that the growth of the labour force will sustain the system. The less money is saved in funds in advance, the greater the dependency on the expansion of the labour force.

The sustainability of the pensions system depends more or less on population growth and an expanding labour force. Other contributing variables include the birth rate, mortality rate, pension benefits and pension contributions. In the United States, the system is more focused on defined contribution and individual responsibility, which means that pension wealth is more or less funded in advance for those with salary income. In such an environment, the growth of the labour force is insignificant from an individual’s point of view.

In conclusion

Demographic trends and age structure do make a difference. It is a powerful variable underlying the economy, government finances, pension systems and the investment markets. From the point of view of the welfare society, promotion of employment and prevention of social exclusion lie at the heart of the policy. Hence, population, labour force and employment are not just numbers: behind them hide the welfare society and people’s wellbeing.

The writer is VER's CEO Timo Löyttyniemi.

TLö blogi 2020

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