Is strong growth still possible once the demographic dividend has been paid out? Of course it is, at least in theory. Even if the workforce isn’t expanding, strong-enough gains in worker productivity can substantially lift the economy. Longer hours and longer careers can theoretically have the same effect. But it is far from clear that in practice, these solutions will work, given the advanced age of Europe’s workers.
To see why, picture two neighboring towns, sharing all the same infrastructure and economic opportunities, with one key difference: their median age. In the first town, which I’ll call Morningburg, the average resident is 28. In the second, which I’ll call Twilight City, the average householder is 58.
Research indicates that even with all the same resources at their disposal, these two places look very different, and not just because one’s grocery store does a booming business in diapers while the other’s has a whole aisle devoted to Centrum Silver.
In Morningburg, young workers are rapid, plastic learners, eager to try out new ways of doing things. Since they’re still hoping to make a name for themselves and maybe get rich, they take a lot of risks. They push their managers to expand into new markets, propose iffy but innovative product lines, maybe start their own firm if the boss won’t let them advance fast enough. For the right opportunity, they’ll put in 18-hour days for a year or more.
In Twilight City, time horizons are shorter—people aren’t looking for projects that will make them rich or famous 20 years from now. They are interested in conserving what they have. That’s mostly rational, given Twilighters’ life stage; but studies show that older people worry more than younger ones about losses and are therefore especially averse to risk. Twilighters also tire more easily and need more time off for illness, so hours worked slowly decline each year. Wages stay steady, however; Twilighters, like most people, get very angry if you try to cut their salary.
That makes Twilighters expensive—so when they lose a job, finding another is tough. As a result, Twilighters tend to cling fiercely to their positions, and may block younger workers from getting a foothold in the labor market.
The difficulty of reemployment contributes to Twilight City’s surprisingly high, but somewhat deceptive, rate of entrepreneurship. Looking closely, we find that businesses there are disproportionately owned by semi-retirees who have hung out a consulting shingle, or become part-time caterers, or invested in a hobby business like an antique store. These businesses typically don’t have much growth potential, in part because cautious Twilighters won’t (or can’t) borrow money for expansion.
Morningburg is a boomtown, prone to periodic savage busts when the young strivers realize that those fur-bearing-trout farms they invested in aren’t going to make them rich. Twilight City is a less volatile place—but little change also means little growth.
In theory, smart policy could make Twilight City look a little more like Morningburg: public investment and forced savings could boost research and business development; employment laws could be reformed to make labor markets more flexible; heavy investments could be made in education to improve the productivity of Twilight City’s few young workers.
In practice, all of this is likely to be fiercely opposed by Twilight City’s citizens, who tend to vote against change, particularly if it threatens their pensions or health care. Many of the most vehement public demonstrations in Europe over the past two decades have followed attempts at pension reform.
