Dependency ratio and Immigration/emigration

Real economic growth is not just about keeping up with the rate of changes of prices – inflation – but the rate of change in people and people based public expenditure.

Demographic factors can have a huge impact.  A favourable proportion of young people – the demographic dividend –  has been considered a major component of asias economic growth. The world bank estimates 30% of chinas economic growth to this in recent decades.

The noted demographers Bloom and Canning in 2003 attributed the Celtic Tiger effect to the leglaisation of contraception in 1979, increasing the proportion of the working age population i.e reducing the dependency ratio.

A high dependency ratio- the ratio of population of taxpaying age to population of non tax paying age can act as a real drag on economic growth as the youngest and oldest account for the bulk of all public expenditure yet pay little or no taxes. Many european countries face huge increases in this ratio over coming decades.

Even more potent is the demographic drag effect of a large bulge of young people entering the labour market quicker than it can create jobs – the top twenty most effected states in 2007 were also top of the failed states list. It has been a significant factor in the Arab Spring.

What can countries do if they face this problem? One argument is to encourage immigration by young people, Apart from arguments about a too rapid increase creating a drag effect, and apart from arguments about highly skilled and educated people can spur growth the problem is the scale of the issue. For Canada Frances Wooley calculates it would need an extra 6 million immigrants. Axel-Borsch-Supan (Labor Market Effects of Population Aging, National Bureau of Economic Research Working Paper No. 8640, 2001) calculates that Germany would require immigration at the rate of 750,000 a year to 2035 to fully offset the effects of population ageing.

Avoiding logans run type solutions about an ‘excess’ supply of older people what options are available to a free society?   If immigration is not the solution what about emigration.  For Robert Torrens it was a simple matter of supply and demand and comparative advantage.  If one country has too many people and not enough land, and another the inverse, then their is comparative advantage for exchange – for him such population movements were a necessary driver of capital accumulation and growth.  He and Wilmot Horton proposed a system of subsidy, people could exchange a right to welfare for grant of free land and passage.

Of course then there was empire.  The scheme has always been misunderstood by historians as an apologia for empire rather than the typical ruthless extending of logical ideas of classical economists.

But today a dream of retirement in the sun is a dream of many older people, and there are many more places to move freely.  Many countries suffering from a demographic drag and cheap land would welcome the employment prospects of care workers in their own country.

How might we practically structure an economic incentive to emigrate – the tax treatment of housing is an obvious starting point.  Replacing inheritance tax with a yearly wealth tax on large homes would both encourage downsizing, feeing up housing by reducing underoccupation by empty nesters, and would encourage people to sell and move abroad.   The option of capitalising a portion of  future health costs on retirement, in return for a one off sum to move and loss of future at home health entitlements would also have the same effect.  A portion of this could also be spent as aid to boost the health care systems and infrastructure of recipient countries.  I can see sunset communities springing up in many places in the tropics with temperate at altitude climates year around.

If this solution seems unpalatable, think of the alternative higher taxes, later retirement, lower pensions, lower public expenditure on health and education and mass immigration.

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