Alfred Marcus and Mazhar Islam examine how demographic changes introduce new challenges for businesses.

The impacts on countries that have falling working-age populations – Japan, Germany, Russia, Taiwan, the US and China – are profound. First, a shortage of labour is leading to higher pay, which has resulted in an uptick in inflation. Second, economic growth, which arises from having more workers and their being more productive, has been slowing and it is likely to continue to slow. Countries with fewer workers have to increase their productivity rapidly, or else they face diminishing growth. At best, they can maintain the same level of economic activity. However, it will be hard for ageing countries to increase this level. Third, demand will fall.

These reflections about what will happen next are not speculations. Businesses must recognize that a decline in working-age adults means fewer taxpayers and, with fewer taxpayers, the stress on social security and welfare systems of countries that have fewer workers grows. As populations contract, the challenge for governments is to find sufficient revenue to fund programs that look after the elderly, while continuing to nourish the young. Governments must rely on their populations being replenished by immigration or their economies being transformed by technological advances. Without these, the decline in family size – families being neither large nor stable enough – presents a daunting challenge, one that no government has yet to master fully.

Already in the US the number of jobs is exceeding the number of job seekers, a development that makes perfect sense as the number of elderly rises and immigration is curtailed. Without increases in productivity, or delays in the age of retirement, businesses have to recognize that countries with fewer workers are not likely to grow rapidly. Were there to be another economic shock like the great recession of 2007–08 or some other unexpected event like the COVID-19 pandemic, it will be very difficult for countries with declining workforces to return to a normal level of growth.

The positive side of reduced growth in ageing countries is less negative environmental impact. Reduced growth boosts efforts to lower greenhouse gas emissions, but this reduction may be accompanied by declines in food, water, and energy consumption, and lower living standards. Therefore, technological innovation that is good for the planet and good for the corporate bottom line should be a high priority that is pursued vigorously by all companies. Companies also need to closely collaborate with government and policymakers in ageing countries so that the governments undertake policies that promote such technological innovation.

Immigration is the sensible way to replenish lagging working-age populations. Businesses should become major supporters of pro-immigration policies. However, until now, immigration at the scale needed to make a significant dent in the problem has been politically unfeasible in almost all countries. The rise of nationalist leaders around the world and their ascent to power is harming the ability of the world to adjust to the challenge of ageing. Businesses must do all they can to oppose these movements and to put a stop to the policies they represent. It is in the self-interest of business to do so.

The alternative, to persuade citizens to have more babies, or to incentivize them with monetary rewards, is a far slower and less certain way to approach the problem of ageing. Typically, most of the subsidies offered to people to have more children are absorbed by people who would have had such children without the subsidy. Experience in Europe with longer parental leaves as a way to encourage increased births suggests that such policies do not impact birth rates significantly. However, such benefits do lead to better parenting and positive societal benefits. Subsidized childcare does seem to help, though the effects are not sufficient for countries to move their fertility rates back to the replacement level which would guarantee population stability.

Therefore, businesses should support these subsidies. They should support them because they signal to women that they can have families and at the same time fully pursue their careers without impairing either quest to any great extent. Women need to feel that they can participate fully in the workforce. Their participation has never been needed as much as now, especially in ageing societies.

There are several other implications for management about how it should prepare for a situation in countries where the size of the working class is shrinking:

• Salaries and benefits might have to be increased to retain quality human capital which might
  be in great demand in these societies.
  
• Human resource practices must be implemented that attract employees who have traditionally
  remained outside the workforce.
  
• It must be recognized that demand patterns will be far different in ageing societies.
  Marketing and product development will change.

Management must devise strategies that take advantage of the world’s demographic diversity. It cannot rely solely on aging societies as their vitality will inevitably diminish to some degree. As well as making aggressive attempts to innovate technologically, businesses must never let up in their strong support for liberal immigration policies.

Demography and the Global Business Environment by Alfred A. Marcus and Mazhar Islam is out now.

Alfred A. Marcus is Edson Spencer Professor of Strategy and Technology Leadership, Carlson School of Management and the Technological Leadership Institute, College of Science and Engineering, University of Minnesota. Mazhar Islam is Assistant Professor of Management and the Chase Distinguished Professor of International Business, College of Business, Loyola University New Orleans, US