THE COMING WORLD LABOR SHORTAGE A baby bust will soon shake industrialized economies everywhere. To cope, they must start encouraging immigration and discouraging early retirement.
(FORTUNE Magazine) – AGE HEALTHFULLY, retire earlier, and bank on ever richer government benefits. For nearly 50 years, political leaders in North America, Japan, and Europe have promised their citizens varying versions of that bright future. But as the next millennium approaches, it's looking less and less likely that those promises will be kept. The problem: too few workers and too many retirees. During the building of their postwar welfare systems in the 1950s and 1960s, countries everywhere could count on rising numbers of young workers to enter the labor force and carry the cost of state-sponsored pension and health insurance programs. But beginning in the late 1960s, America's baby boom, and the corresponding boomlet in Western Europe, turned rapidly into baby busts. Since the early 1970s, birthrates in almost every industrialized nation have dropped below the 2.1 offspring that women of childbearing age must produce, on average, for a country to replace its population. As a result, a demographic San Andreas fault now runs beneath the economies of the West. Will it cause an earthquake? Yes, most likely a big one. Says R. Scott Fosler, vice president of the Committee for Economic Development, a business-backed public policy research group: ''Population pressures are as strong as they are inevitable. And the population pressures we face today are without precedent in human history.'' The first gentle tremors have already begun. Barring an immediate and sustained upswing in birthrates -- a most unlikely prospect -- they will strike with gathering force after the turn of the century. Among the consequences:
-- Companies will grow increasingly desperate for young workers. Recently, Japan's Ministry of Labor surveyed 268 companies and found that they were already unable to recruit even a quarter of the new workers they would like. Over the coming decade, the number of new job seekers under age 25 will decrease 3.6% a year in West Germany and about 2% in Britain, France, and Japan. The result: Work forces in Europe and Japan will actually contract. In the U.S., the native-born labor force will still grow, but at the slowest rate since the 1930s -- less than 1% a year.
-- Societies everywhere will get a lot grayer. By 2030, people over 65 could account for 22% of the populations of the seven biggest Western economies, up from just 12.5% in 1980. And aided by advances in medical technology, the ranks of the older old -- those living beyond 75 -- are rising even more swiftly. They now constitute the fastest-growing population segment in almost every major industrialized country. Unless the trend toward earlier retirement is reversed, many folks will spend more years as retirees than as workers.
-- The cost of supporting the old will grow nearly unbearable. By 2025 what economists call the dependency ratio -- the proportion of pensioners 60 or older to all workers -- will have roughly doubled in Japan, the U.S., and West Germany (see chart). If the present benefit systems are kept in place, U.S. programs for the elderly could consume 50% of the federal budget by then. In Italy government spending on pensions is projected to rise fivefold over the same period, even after adjusting for inflation. If the system isn't to collapse, payroll taxes will have to keep pace. (Italy, you will recall, is the birthplace of Signore Ponzi, whose get-rich scheme also required a constantly expanding inflow of newcomers to let older investors cash out.)
-- Immigrants will bang on the doors of the developed world as never before. The baby bust hasn't hit the Third World yet. Over the next 20 years the working-age population in developing countries will rise by roughly 700 million -- just about equal to the total current population of North America, Japan, and Western Europe. Unskilled workers in the rich nations can expect that growth to exert powerful downward pressure on their wages. Says John Sewell, president of the Overseas Development Council, a Washington, D.C., think tank: ''The work-hungry multitudes of the Third World will either descend on the developed economies in a flood of migration, compete with increasing success for the low-skilled and semiskilled jobs that will migrate to them, or most likely, do both.'' None of these are issues that parliamentary democracies find easy to tackle. Says Paul Johnson, an economic historian at the London School of Economics: ''Because population trends never affect politicians before the next election, they reinforce governments' tendencies toward long-term irresponsibility.'' Nevertheless, their common demographic problem will eventually force the U.S., Japan, and Western Europe to focus on three options. They should find ways to expand their domestic work forces and encourage more immigration. They should boost productivity so that their economies can better carry the burden of more elderly dependents. And they should rethink public pension and health care policies. Herewith an account of the particular challenges each society will face in the years ahead -- and how each will probably respond.
JAPAN Nowhere will the shocks hit harder or earlier. Japan's elderly population is growing at nearly twice the West German rate and six times that of the U.S. By century's end, what had been the world's youngest industrial society 20 years earlier will have become the world's oldest. A recent report by the Japan Federation of Employers calls this ''the most difficult problem facing Japanese companies.''
One likely casualty: those companies' longstanding reliance on rigid promotion and pay systems based on seniority. To attract the young, Japanese business may be forced to shrink the wide gap that now exists between the salaries of recruits and older workers and to promote newcomers faster. Another casualty will be Japan's vaunted savings rate. One reason the Japanese are such savers is that no other developed economy expects its old folks to finance so much of their retirement. Employer-paid pensions are skimpy -- usually a lump-sum payment equal to just over three years' salary. Government benefits are relatively meager too. But as more workers retire and begin drawing on the money they have set aside, many forecasters predict that Japan's savings rate could fall 50% by the early 21st century. Compared with their American and European peers, a far higher proportion of Japan's elderly stay in the work force. Over a third of all men and 16% of all women over age 65 are employed, mostly in low-skilled, part-time jobs. But they could be put to more productive use elsewhere. Currently more than 75% of them toil in agriculture or in Japan's notoriously inefficient retail distribution system -- two sectors that U.S. trade negotiators have flagged as unfairly impenetrable to outsiders. Japanese women are a relatively untapped labor source. But the burden of caring for dependent parents has recently begun to force growing numbers of the women who do work to quit or take leaves. More than two-thirds of Japan's senior citizens live with their children, vs. a tiny fraction of America's elderly. To make it easier for women to balance jobs with family responsibilities, the government has launched a crash program to build 9,000 new day care centers for the old by the year 2000. Xenophobia will probably continue to close off this island nation's most promising source of new labor -- immigration. Even the employers' association opposes letting in more foreign workers. Of the 80,000 legal migrants to Japan in 1988, 88% were entertainers and sports figures. And the government recently stiffened laws that fine employers who hire illegal immigrants. Some 14,000 illegals were caught, about half of whom were low-skilled construction and factory workers. Most of the remainder were Filipino and Korean domestics, bar hostesses, and prostitutes. To break their labor bottleneck, Japanese companies are opting instead for heroic increases in capital spending (see The World). By installing advanced automobile manufacturing technology, for example, Toyota hopes to boost car output by at least 30% without adding the 3,000 new workers such an expansion would otherwise require. Though Toyota's new cars are meant to satisfy rising domestic demand, some foreigners worry that Japan Inc.'s collective investment in efficient, expensive robots could aggravate international trade frictions. If growth at home falters, those additions to output could turn into unwelcome new exports. Still, such tensions should be partially offset by Japan's continued willingness to export jobs as well. The Ministry of International Trade and Industry (MITI) estimates that Japanese direct foreign investment will average 14% annually through the 1990s, with much of that money going to build factories in the developing economies of Southeast Asia. MITI projects that by 2000, employers will have shifted some 800,000 jobs offshore.
EUROPE Because their unemployment rate -- nearly 9% by the latest count -- remains high compared with those of Japan and the U.S., the Common Market countries are well-cushioned against any immediate labor pinch. But a pinch is coming all the same. In West Germany, the most extreme case, birthrates now average just 1.3 kinder for every childbearing woman -- a trend that, if continued, would guarantee that country's extinction in the not-so-distant future. Nor is the opening of the border with Eastern Europe the demographic godsend it might seem. Birthrates there, though slightly higher than in the West, are also below replacement levels. Wrongheaded retirement policies are compounding Europe's long-term labor troubles. Since 1970 work force participation rates among those ages 55 to 64 have fallen more than 20 percentage points on average. Today nearly half of all European men and some two-thirds of all women in this age group are retired. And, unlike Japan and the U.S., which restructured their social security systems in the 1980s to build up trust funds for the eventual retirement of today's workers -- even if only with government IOUs -- European public pension systems operate hand to mouth. Reserves of the West German pension fund are just two months deep. The march toward a single European market after 1992 is giving the Old World's economies some much needed flexibility. Manufacturers from the high- wage countries in the north, for example, have been scrambling to open plants in low-wage Spain, where unemployment nonetheless hangs at 16%. But there are limits to what Project 1992 can accomplish. In Europe, as in the rest of the industrialized world, most of the new job growth will be in services. Says Paul Johnson: ''Even if all its political frontiers disappear, Europe's language frontiers will remain an obstacle to the export of service jobs.'' Eventually European governments will have to dismantle schemes that now encourage their fiftysomething set to chill out prematurely on the Costa del Sol. Put in place in the mid-1970s and early 1980s, when unemployment took off, these plans typically offer workers generous disability and long-term unemployment compensation to tide them over until they reach pensionable age. Almost half of West Germans eligible to claim a state pension at age 60, for example, enter retirement after having first participated in a disability program. Winfried Schmahl, who advises the West German government on pension policy, estimates that if the average retirement age of German workers, currently just under age 60, remains unchanged, payroll taxes will rise from 18.5% of ( paychecks to over 41% by 2030. Keeping older workers on the job just one year longer, he figures, could reduce that impending payroll tax bite to around 38%.
Right now, no European politicians are advocating taking anything away from their elderly. But for most, the obvious alternative -- absorbing more labor from people-rich places like their former African and Asian colonies or countries such as Turkey -- is even less palatable. Drawn by the brighter employment prospects that the single market holds, such workers, who last arrived in great numbers in the early 1970s, are starting to wash up on Europe's shores again. So far the European Community countries have responded by tightening immigration laws, with a few halfhearted exceptions like the amnesty that the Italian government is currently offering illegal immigrants.
But Norbert Walter, chief economist with Deutsche Bank, thinks that predictable reaction is shortsighted. A more liberal policy, he argues, would help both Europe and its neighbors. Says he: ''Our economies have never faced such a massive change in age structure at a time of such rapid technological change and increasing global competition.'' One sensible step he advocates is to set aside places in European universities for more Third World students, as the native-born's number declines.
UNITED STATES No country is better positioned to cope with demography's future shocks than the U.S. During the 1990s America's working-age population will be the largest and most productive in its history. Some 78 million baby-boomers who depressed productivity as neophytes in the 1970s and 1980s will be reaching their mid- 30s and 40s as seasoned, mature employees. Meanwhile, the proportion of new retirees to workers will decline for a while. The danger is that the U.S. will be lulled into an unwarranted sense of complacency. By 2000, when the oldest of the boomers will be 55 and thinking about early retirement, the Medicare trust fund could already be exhausted. A study for the Ways and Means Committee in Congress estimates that if Medicare outlays grow by just 1% a year beyond current baseline estimates, annual deficits in the elderly health care system will top $180 billion by the late 1990s. As the boomers start retiring in droves after 2010, federal spending on the elderly -- 29% of the budget today -- will soar. How high? That's anybody's guess. Just don't count on the Social Security Administration to guess right. $ For example, the SSA expects U.S. birthrates to rise from the current 1.8 children per fertile woman to near replacement level by 2000 and remain there. But with nearly 70% of all women of childbearing age in the work force, contraception all but universal, divorce rampant, and one pregnancy in four ending in abortion, that assumption looks like fantasy. Should birthrates drop, instead, to the 1.6 rate assumed in the SSA's more pessimistic scenario, spending to support retired baby-boomers will exceed the fund's projected income by 35%. The work force shouldering that awesome burden will be more diverse than any in America's postwar history. Netting out arrivals and departures, over 80% of the additions to the work force in the 1990s will be blacks, Hispanics, recent immigrants, and women -- increasingly, single mothers supporting dependent children. Moreover, a terrifying gap looms between the skills that employers need and the training that this new work force will have received. The Bureau of Labor Statistics estimates that jobs requiring a college degree will rise from 22% of the total to 30% by the end of the century. But college enrollment among black youth declined 7% in the past decade. Among Hispanics, the fastest- growing group of new labor force entrants, the high school dropout rate is 40%, triple the national average. Says Frank Doyle, senior vice president of corporate relations at General Electric: ''The demographic shortfall is being compounded by a severe educational deficit.'' That deficit will only worsen if America's family structure continues to weaken. Nearly a quarter of the 3.8 million births recorded in 1987 were to unmarried women -- a 40% increase since 1980. Some 62% of all black infants were born out of wedlock, one-third to teenage mothers. Today, 60% of black children and 20% of white children live with a single parent, and poverty in these households is widespread. The Committee for Economic Development calculates that if these trends continue, by the year 2000 the U.S. could have as many as 20 million young working-age adults with poor prospects of holding any job. Obviously the nation cannot afford to squander so much potential talent. But what is to be done? Says GE's Doyle: ''For U.S. corporations, tomorrow's competitive battles will be won or lost on the strength of their ability to build and retain a skilled work force.'' The weapons for waging that battle begin with effective preschool programs like Head Start and extend to expanded, career-long, on-the-job training by employers. The U.S. should also rethink its immigration policies. No society in history has proved more able to absorb large numbers of immigrants successfully. Over the past decade, America opened its doors to nearly 600,000 new migrants a year -- the greatest number since the early 20th century. But the country needs more -- as many as a million a year -- to compensate for its low birthrate. Would more immigrants hurt workers born in the U.S.A.? Almost certainly not. In a newly published book, The Economic Consequences of Immigration, Julian Simon, a professor of business administration at the University of Maryland, concludes, after an exhaustive study, that immigrants contribute far more in taxes paid -- including Social Security taxes -- than they consume in welfare benefits. He also demolishes the myth that immigrants take jobs away from the native-born. ''There are lots of painful antidotes to America's demographic pressures,'' Simon says, ''but allowing in more immigrants is the only painless one.'' In addition, the U.S. should follow the lead that Canada and Australia have taken and admit more immigrants on the basis of their education and skills. Right now such decisions depend almost exclusively upon whether an applicant has relatives who have already been accepted into the U.S. America's other huge source of potential new labor is the elderly themselves. According to the National Center for Health Statistics, nearly two-thirds of the U.S. populace ages 65 to 74 are hale and hearty. But those willing to keep working confront serious disincentives. For starters, once retirees under 70 reach an earnings ceiling of $9,360, the Social Security benefits that they receive fall by $1 for every $3 they earn. Add on state, local, and Social Security taxes, and would-be older workers can pay a marginal tax rate of more than 80%. Small changes could make a big difference. When Congress reformed the Social Security system in 1983, for example, it agreed to raise the age at which retirees receive full benefits from 65 to 67 over a 24-year period, starting in 2003. But it kept the age of eligibility for collecting at least partial benefits at 62. Princeton University economist Alan Krueger estimates that if this early retirement option were lifted to age 65, workers in the 62-to-64- year-old group might produce as much as $25 billion in new tax revenues. - For generations that have come to view early retirement as their inalienable right, the suggestion that they should stay at work longer is the moral equivalent of castor oil. But combining such changes with steps to permit more flexible employment options during one's working life could make them easier to swallow. JUST IMAGINE that employers make more room for experienced retirees to take part-time jobs. What would happen? Younger workers might be freed up to return to school for further training, single mothers to spend more hours with their dependent children, and the increasing number of Americans who must devote time to the care of aging parents given a much needed break. Such a radical shift makes social as well as economic sense. Says Ken Dychtwald, author of a recent book entitled Age Wave and chairman of a consulting firm bearing the same name: ''The form and fit of American life is still geared to a steady supply of large numbers of young people, who just aren't going to be there in the future. As our country ages, we have to redesign the economy to facilitate resource sharing across the generational divides.'' Ultimately, that's the difference between managing the coming demographic upheaval and suffering an actual earthquake. We already know roughly when the upheaval will hit and how hard. The extent of the damage, then, depends upon how well governments and corporations throughout the industrialized world prepare. And how soon.
CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: MANY MORE ELDERLY TO CARRY Divide the nonworking elderly over age 60 by the total work force and you get what economists call a dependency ratio. Another name for it: trouble.
CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: HOW THE BABY BOOM WENT BUST According to demographers, societies shrink when women of childbearing age fail to produce, on average, at least 2.1 offspring.