Demographic Origins of the Great Recession: Implications for China

• Published date: 01 March 2013
• Date: 01 March 2013
• Author: Danielle Lamb,Rafael Gomez
• DOI: http://doi.org/10.1111/j.1749-124X.2013.12017.x

97

China & World Economy / 97–118, Vol. 21, No. 2, 2013

©2013 The Authors

China & World Economy ©2013 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Demographic Origins of the Great Recession:

Implications for China

Rafael Gomez, Danielle Lamb*

Abstract

The demographic dividend, that is, the growth of the working age population aged 16 years

relative to younger and older age dependents, has often been cited as a crucial component

of the accelerated economic growth experienced by disparate countries and regions at

different points in time. Generally less emphasized are the ramifications of this process

when it occurs in reverse; that is, when the relative size of the working age population

begins to shrink. Related to this is the more subtle effect of changes to the age structure of the

overall working age population, which can have compounding or offsetting effects in relation

to the demographic dividend noted above. This paper explores how these age-related

phenomena were instrumental to both the Great Depression and the Great Recession of

2008. We explore how the generational composition of economic actors and the aging of the

baby-boom worker may have played a role in provoking these remarkable recessionary

periods. The reversal of the demographic dividend and the aging of the working age

population are factors now contributing to the propagation of the global economic downturn,

as witnessed in the example of Japan over the past half-century. This paper applies the

lessons of the Great Depression to offer a forward-looking analysis of the Chinese economy.

China is on the precipice of a significant demographic shift whose implications for economic

growth are explored.

Key words: age structure, demographic dividend, economic growth, financial crisis, recession

JEL Codes: J11; J18; 04

I. Introduction

The fundamental impulse that sets and keeps the capitalist engine in motion comes from the

*Rafael Gomez, Associate Professor, Centre for Industrial Relations and Human Resources, University of

Toronto, Canada. Email: ralph.gomez@utoronto.ca ; Danielle Lamb, Assistant Professor, Ted Rogers

School of Management, Ryerson University, Canada. Email: danielle.lamb@ryerson.ca. This paper is a

revised version of a presentation made at the International Symposium on Demographic Dividend and

Socio-economic Development organized by the Academic Division of Economics, Chinese Academy of

Social Sciences (CASS) and the Institute of Population and Labor Economics, CASS, which was held in

Beijing on 20 and 21 August 2012. We would like to thank Professor David K. Foot as well as participants

at the CASS conference for their useful comments. All errors are exclusively our own responsibility.

98 Rafael Gomez, Danielle Lamb / 97–118, Vol. 21, No. 2, 2013

©2013 The Authors

China & World Economy ©2013 Institute of World Economics and Politics, Chinese Academy of Social Sciences

new consumers, the new goods, the new methods of production or transportation, the new

markets, the new forms of industrial organization that capitalist enterprise creates.

Joseph Schumpeter (1942, pp. 82)

Attempting to understand the sources of long-run economic growth, a vast empirical literature

has developed around the augmented Solow–Swan production function, where national

output is determined by the accumulation of (and interactions between) physical and

human capital, labor supply and technological efficiency (Temple, 1999). Viewed from this

framework, the relationship between demographics and economic development is clear.

Output growth can be realized through increases in the size of a country’s available labor

force as well as in improvements to human capital (Hall and Jones, 1997; Galor and Weil,

2000). What is relatively less explored is the association between changes to a country’s

age structure (i.e. the transition from a young to middle-aged to older workforce) and

extended periods of declining or expanding economic growth (Malmberg and Sommestad,

2000; Gomez and Hernandez de Cos, 2008a,b). In this respect, the demographic dividend

(i.e. the growth of the working age population aged 16–64 years relative to younger and

older age dependents) has been cited as a crucial component of the accelerated economic

growth experienced by disparate countries and regions at different points in time (Bloom

and Williamson, 1998).1

The objective of the present paper is to explore how the reversal of such a demographic

dividend can lead to lower economic growth and/or stagnation, with specific reference to

China, currently in the latter stages of its own demographic maturation. A demographic

reversal is defined here as a period of rapid and sustained decline in the working age

population (aged 15–64 years) relative to younger (0–14 years) and older age (65+ years)

dependents as well as a decline in the share of prime age workers (aged 35–54 years). We

will demonstrate how the reversal of the demographic dividend and other age-structure-

related phenomena have acted as both impulse factors and propagation mechanisms in the

stagnant rates of economic growth observed in many countries since 2008. As an example

of the conceptual framework adopted in the present study, we show how changes to

population age structure can explain the pattern of economic expansion and contraction

observed in Japan over the past 60 years. The analysis then revisits the Great Depression

of the 1930s through the lens of the demographic dividend. The proceeding section of the

1 Growth in the relative size of the working age population (15–64 years) is brought about by a precedent

baby-boom period perhaps lasting 10 to 15 years followed by a pronounced and secular decline in birth

rates.