Taking into account that a country’s economic activity depends on the volume of its resources and the way in which they are used and combined, the current demographic transition poses two simultaneous challenges. On the one hand, lower population growth slows down the increase in available resources, in this case, the labour factor. On the other hand, population ageing causes the most utilised labour resources – usually the population between 25 and 59 years of age (see first chart) – to decrease as a share of the total. If we look at projections by the United Nations,1 the combination of these two factors seems to lead, ceteris paribus, to a significant slowdown in economic growth in the coming decades. This is the case both for advanced countries, where the total population has already stagnated at best, and especially for emerging and developing countries, where for the first time the share of people of working age will decline relative to the population as a whole (see second chart).2

Among the elements that could help mitigate the effects of the current demographic transition on economic growth, one of the main areas of action is policies aimed at increasing the supply of labour. In this regard, despite the convergence observed in recent decades due to social and educational factors,3 even today stark differences persist in the labour force participation rate between countries, as well as between population groups within these countries, with the lowest rates found among women and with a sharp decline in workers from 60 years of age (see the third chart for the EU as a whole and the contrast between two of its member countries, Italy and Sweden). Some of the levers that can help boost participation among women include, above all, policies that facilitate a balance between work and family life, such as flexible part-time work arrangements, non-deterrent tax treatment for secondary earners and adequate provision of early childhood education services.4 On the other hand, in order to extend people’s working lives, incentives can be implemented to align the effective retirement age with the statutory one, to promote the compatibility of retirement and certain forms of employment, to bolster active policies with lifelong learning and to improve the health conditions in old age.5 Also, given the differences between world regions in the stage and intensity of these demographic changes and the persistence of wide gaps in economic development, managing migratory flows will continue to play an important role.6 Only an ambitious implementation of this set of policies can significantly cushion the effects of the demographic transition (see example for different EU countries in the fourth chart, based on UN projections).7

In addition to greater use of the labour factor, its more efficient use combined with capital resources is also a key source for overcoming the determinism of the current demographic transition. Over the past few decades, labour productivity has continued to increase at a steady pace globally, driven by structural change and macroeconomic stabilisation in emerging countries, which have facilitated efficiency gains, improvements in education level and the accumulation of productive capital (see fifth chart). However, the effect of these processes tends to be progressively exhausted as the degree of economic development advances and sectoral tertiarisation becomes more pronounced. Moreover, we observe a practical stagnation in the translation of technological advances to total factor productivity (TFP).8 In this regard, recent developments in the field of artificial intelligence (AI) have opened the door for this general-purpose technology to boost TFP across a broad spectrum of sectors, particularly those involving more cognitive tasks, as well as accelerating innovation processes. However, there is still significant uncertainty over the degree of complementarity/substitutability of AI with the labour factor,9 leaving ample scope for future scenarios. Some baseline estimates place the increase in labour productivity in the US in the range of 1%-1.5% per year,10 which would offset the demographic brake on GDP growth discussed above. In the rest of the world, the expected gains would likely be more moderate given the reduced exposure to and preparedness for the adoption of AI, including institutional aspects, the rollout of digital infrastructure and vocational training (see sixth chart).11

Policies aimed at increasing the labour supply and boosting productivity have a high potential to offset the effects of the demographic transition. However, their effectiveness will depend decisively on three factors. Firstly, it will depend on the existence of favourable conditions for business activity and job creation. In the EU, this need has been echoed in the Competitiveness Compass,12 which seeks to revitalise the growth capacity of the European economy through improvements in the regulatory framework of the internal market and the mobilisation of capital towards strategic investments. Secondly, the range of professional skills needs to be adapted to technological changes, the green transition and new patterns of demand in an ageing society. To this end, active labour market policies must minimise the costs of adjusting to this new reality and firms must adapt their job positions, paying particular attention to jobs at risk due to task automation, increasingly shaped by advances in AI. Thirdly, the set of public policies must be adapted to promote further improvements in citizens’ welfare at the same time as maintaining fiscal discipline,13 while private actors will have to adjust their consumption and investment decisions to the new income and wealth conditions across the life cycle.14 In both cases, the distributional effects of the ongoing changes will also be relevant for determining the magnitude of the challenges.