Demographics: Economic Consequences

As thematic investors, we look for phenomena that are transforming economic prospects across multiple industries. Then, we seek to identify companies that will benefit, are investable through public equities with ample liquidity, and are likely to pay off within three to five years.

We believe successful investing requires a long-term unconstrained global perspective and that using investment themes as an organizing framework for our research provides that perspective. We also believe that long-term secular trends influence theme development, the macroeconomic environment and investment markets. One of the most important and enduring secular trends is demographics in terms of economic impacts.

Demographics encompass the study of population groups based on factors such as age, race, gender, fertility rates, mortality rates, income and migration patterns. While the future is unknowable, demographic data provides a degree of certainty to some aspects of the future. For example, if we know the number of 30-year-olds in the world, we know with certainty that the number of 40-year-olds, ten years from now, will be no greater and, in fact, will be fewer. Further, if we know the number of 30-year-olds by country and by gender, we can apply regional mortality rates to closely estimate the populations and distribution of these groups over the next decade.

In behavioral finance, “anchoring” is the tendency to make decisions based on current facts and past results even though they may have little bearing on future outcomes. It is difficult to envision change. Markets generally overemphasize present data and short-term trends while underestimating and undervaluing the impact of longer-term structural changes. We believe demographic trends help us envision the future and mitigate the influence of anchoring. Here are some demographic trends we find relevant to our investment thinking.

Workforce Demographics

Workforce demographics pose a headwind to economic growth. This can be clearly seen in the long-term trend of dependency ratios.


Dependency Ratios

Source: World Bank


Dependency ratios reflect the percentage of people 65 and older compared to the working age population (defined as those ages 15 to 64). The higher the ratio, the more workers need to produce to maintain, much less improve, the standard of living for all (measured by GDP per capita). Many of the countries that currently are among the largest contributors to global GDP are the most demographically challenged. These demographic headwinds contribute to a slowdown in productivity growth. Productivity growth has fallen in every major economy and in almost every sector.

While not immune from this trend, the U.S. is one case where a larger percentage of those over 64 are staying in the workforce. In the U.S., the Phillips curve, which postulates a reverse correlation between the unemployment rate and wage inflation, appears to have broken down. Demographic changes in the labor force may partially explain why. A St. Louis Fed analysis found that almost all of the net increase in employment since 2000, some 18 million jobs, is attributable to workers 55 and older.


Cummulative Change in Employment by Age Group (Millions)

Source: Bureau of Labor Statistics: Labor Force Statistics from the Current Population Survey


The population is aging and more people are continuing to work later in life. In 2000, 32% of those 55 and older were in the workforce. In 2018, that percentage had increased to 40.2%. The combination of a higher participation rate for seniors, a relatively flat participation rate for all others and 100% of net job gains attributable to seniors, helps explain subdued U.S. wage inflation. The pace of wage increases slows for older workers as they tend to place a higher value on benefits, flexibility and fewer hours.

What is inevitable is that this trend will end. The population is aging at a slower rate and the older cohort of baby boomers will start to age out of the workforce. The Phillips curve may have life left. More important, developing regions of the world with younger populations will become an important source of human capital. Companies will intensify recruiting, training and locating facilities in emerging markets. This will contribute to a shifting and rebalancing of global economic geographies.


Approximately a decade ago, for the first time in history, more than half the world’s population lived in urban areas. This migration trend from rural to urban is projected to continue for the foreseeable future. By 2050, the urban population will more than double its current size with nearly 70% of people living in cities.


Population of the World, 1950-2050

Source: United Nations, World Urbanization. Prospectus: The 2018 Revision


Some regions of the world are more urban than others but all are experiencing the same migratory pattern.


Urban Population (% of Total)

Source: United Nations, World Urbanization. Prospectus: The 2018 Revision


A decade ago, our original urbanization investment theme focused on the buildout of urban infrastructure, particularly in China and India, two countries that were urbanizing the fastest, albeit from the lowest starting points. As the economies in those emerging markets slowed, we shifted our focus to the re-urbanization of American cities, the development of urban-like villages surrounding city centers and new businesses built for and dependent on population density.

Jonah Lehrer of The New York Times wrote about the research of Geoffrey West and Luis Bettencourt, two physicists who studied the economies of agglomeration – the benefits that firms and people enjoy from close proximity to one another.


In city after city, the indicators of urban metabolism, like the number of gas stations or the total surface area of roads, showed that when a city doubles in size, it requires an increase in resources of only 85 percent. Whenever a city doubles in size, every measure of economic activity, from construction spending to the amount of bank deposits, increases by approximately 15 percent per capita. It doesn’t matter how big the city is, the law remains the same.

A growing city makes everyone in that city more productive, which encourages more people to move to the city, and so on. This superlinear pattern demonstrates why cities are one of the single most important inventions in human history. As cities get bigger, everything starts accelerating. A key reason cities keep growing is their ability to create massive economies of scale.


Not surprisingly, studies show that per capita GDP rises as countries become more urban. In the U.S., both by cause and effect, choice and consequence, the wealthiest are living closer to city centers than ever before. In addition to population migration to urban areas, the graph below shows that over the last 25 years there has been a pronounced wealth migration to urban areas.


Per Capita Income, $000s (Composite Average 50 Largest Cities in the U.S.)

Source: UVA Demographic Research Group, US Census, iamB Consulting


City dwellers, on average, have higher incomes and higher education levels. This is important from an investment perspective as spending capacity, more than absolute population, influences consumer spending patterns. It is wealth migration within the urbanization trend that is driving new businesses and new business models.

An Aging Population

Population aging is a demographic trend worldwide. It is most acute in economically developed countries where fertility rates tend to drop as economies grow. Fertility rates have dropped below replacement rates almost everywhere except India and Africa.


Fertility Rate, Total – Births per Woman (% of Total)

Source: (1) United Nations Population Division. World Population Prospects: 2017 Revision. (2) Census reports and other statistical publications from national statistical offices, (3) Eurostat: Demographic Statistics, (4) United Nations Statistical Division. Population and Vital Statistics Report (various years), (5) U.S. Census Bureau: International Database, and (6) Secretariat of the Pacific Community: Statistics and Demography Programme.


As a result, global population growth is slowing, and humans appear to be on a long-term demographic path toward self-extinction.


Slowing Population Growth

Source: (1) United Nations Population Division. World Population Prospects: 2017 Revision. (2) Census reports and other statistical publications from national statistical offices, (3) Eurostat: Demographic Statistics, (4) United Nations Statistical Division. Population and Vital Statistics Report (various years), (5) U.S. Census Bureau: International Database, and (6) Secretariat of the Pacific Community: Statistics and Demography Programme.


Declining fertility rates, improved health, and increasing longevity are swelling older populations. By 2050, the number of people 60 and older will increase from 900 million to 2 billion, going from 12% to 22% of the world’s population. By 2020, for the first time in history, people age 65 and over will outnumber children under five. Improvements in nutrition, sanitation and healthcare are why more children today reach adulthood, and why most adults reach old age. The longer you live, the longer you’re likely to live.

Because global population growth is slowing, demand for all sorts of things is also slowing. Japan is the most demographically challenged country in the world. There are no good models for population shrinkage. Depopulation has already resulted in Japan having eight million empty houses.

While Japan may become the world’s largest nursing home, China is right behind. China’s workforce began declining in 2012 and its fastest growing population segment is those over 65, not a good combination for economic growth or productivity. China’s fertility rate is between 1.2 and 1.6, well below the 5.9 rate in the early 1970s and less than the 2.1 needed to maintain a stable population.

The economic consequences of demographic trends in fertility, mortality, and workforces, directionally similar but measurably different in different parts of the world, point to slower global growth, subdued inflation in the U.S. and low interest rates in developed countries for a very long time. At the same time, urbanization is sparking productivity gains and innovative new businesses.