Is the Problem of Population Aging Real? An Answer Obtained from the Labor Force Participation of the G7 Countries

Abstract

Old-age dependency ratio (OADR) is commonly used to indicate the financial burden of population aging; increases in OADR have caused widespread concerns. To better measure the financial burden, this paper proposes a dependency ratio of non-labor-force population to labor-force population (NLDR). This ratio includes OADR as a special case. This paper finds that, when measured by NLDR, financial burden actually declined in five of the G7 countries during the years 2000–2014. To project future trends, labor force participation rates by age f(x) can be forecasted using the coherent Lee-Carter method. This paper combines the forecasted f(x) and the population projections of the United Nations, to forecast increases of NLDR for the G7 countries between 2014 and 2050. These increases are on average less than one-fifth of the increases projected for OADR. Because OADR ignores the increase of labor force participation, its description of the problem of population aging for the G7 countries in the past is unrealistic and inaccurate, and forecasts of the future based on OADR are likely to be just as unrealistic. Understanding the conditions and reasons for increases in labor force participation can provide valuable insights into the issues of population aging in China, where the remarkable increase of OADR may result in real financial burdens. One condition for labor force participation to increase could be that people remain in good health, which makes continuing to work more feasible. Other reasons for labor force participation to increase are likely to be found in government policies that encourage people to continue working longer. For China, collecting reliable data on labor force participation is also crucial. Without these data, the effects of the policies that encourage people to continue working longer cannot be detected; and therefore the policies cannot be properly developed.