A basic axiom of economics is that the amount of goods and services a society can generate is a product of the number of workers multiplied by the productivity per worker.
Strong growth in both factors has driven an unprecedented surge in human prosperity since the Industrial Revolution began in England nearly three centuries ago. Now it is all about to change.
The demographic engine is slowing dramatically around the world. The worker boom powered by the 20th century’s high birth rates, advances in public health, and increasing female labor force participation is decelerating and reversing over most of the planet.
The most profound change is the aging of societies driven by the historically sudden voluntary drop in global fertility. The average fertility rate in Organization for Economic Cooperation and Development countries fell from 3.3 children per woman in 1960 to 1.5 in 2022, according to OECD data. That’s below the 2.1 needed to maintain a steady population (absent migration), known to demographers as the replacement level. China’s fertility rate is even lower; its population, like Japan’s, has already begun to fall and is rapidly aging. On current trends, total global population will be falling before the end of the century.
The implications for policymakers and executives are enormous. As population growth slows and reverses, companies and countries will need to better use their human capital and accelerate productivity if they hope to maintain healthy growth. Their relative ability to meet this challenge will be one of the strongest determinants of the balance of power in global economies.
Historical growth drivers
In most regions, economic expansion over the past 35 years has been driven nearly as much by labor force growth as by productivity increases. The major outlier has been China. Investing heavily in education and export-driven industrialization, China derived an astounding 92% of its growth from productivity gains, according to Oliver Wyman Forum analysis. While the country’s labor force has expanded by only about 20% since 1990 (well below the global average), worker productivity increased by a factor of 14.5. For perspective, if India had been able to match China’s productivity growth over this timeframe, its GDP would be three and a half times larger than it is today.
Can China continue at this pace? As manufacturing supply chains diversify and trade tensions increase, China will need to make the transition to a more balanced, domestic consumption-driven economy, even while facing fierce demographic headwinds. Projections that China will become the world’s largest economy are predicated on continued per-worker productivity growing at two and a half to three times the US rate through 2050. Just how sustainable that outperformance will be remains an open question.
The productivity imperative
Looking out over the next 25 years, we know that the pool of potential workers will both age and grow more slowly overall. National pro-natalist policies have met with little if any success where they have been tried. And even if birth rates were to double tomorrow, they would not supply workers for two decades.
Aging will put downward pressure on labor force participation, but this can be mitigated by innovation and policy at both the company and national level. Productivity growth is by far the greatest variable, with massive implications for potential growth outcomes.
Following the demographics
Companies and policymakers need to account for aging and smaller populations to encourage broader participation and longer working lives. Governments will need to provide incentives for workers to stay active longer if they are to have any hope of maintaining pay-as-you-go pension systems. This is particularly crucial given that one in five employees globally have already left their previous jobs or are currently job-seeking due to family caretaking responsibilities or illnesses, according to Oliver Wyman Forum surveys.
Companies should focus on keeping the growing cohort of aging workers active via retraining and flexible working arrangements, on the model of efforts in recent decades to make the workplace more hospitable to working parents. Companies and governments will need to account for the care burden of the growing very old (age 80+) population, with recent Oliver Wyman Forum data showing that 44% of employees have individuals relying on them for care, including 30% caring for aging or disabled parents. This burden is disproportionately carried by women, who perform three times as much unpaid care work as men, significantly limiting their working potential.
Both countries and companies will increasingly compete for increasingly scarce workers. Countries that can attract immigrants and integrate them productively will be at a distinct advantage. Companies can build advantage both by facilitating new arrivals through visa support and other means, and by leveraging technology and global networks to access offshore talent.
Solve for productivity
The most powerful potential force to overcome the demographics shortfall will be increasing per-worker productivity. The priority for governments must be to minimize the barriers to innovation and capital formation via tax, regulation, and trade policy. Companies, which perennially have focused on worker productivity, will need to redouble efforts.
The AI revolution holds promise to augment workers’ skills, including helping medical professionals diagnose conditions, automating routine tasks to free up staff for higher-value activities, and enabling new roles that combine human insight with technological capabilities, like AI trainers. Such efforts are in their infancy, but they are already underway in sectors facing labor shortages.
The greatest imperative will be to develop human capital. This is critical globally, but especially so in developing regions. In two of the largest and youngest parts of the world, India and sub-Saharan Africa, a quarter or more of the population is illiterate and a sizable percentage lack even basic academic skills, putting a low ceiling on productivity. Leveraging technology and connectivity into effective, massively scalable education would be a boon to billions.