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What aAging
About StudyPopulations
Innovation of 33 Countries
and Found
The populations of almost all Western countries are getting older, as the Baby
Boomers, born in the 1950s and 1960s, live longer and have fewer children than
previous generations. Population aging of this dimension is possibly unique in world
history. No surprise, then, that it poses serious challenges for the health care systems,
pension schemes, and public debt management of modern societies.
More often than not, politicians see economic growth as a means to alleviate these
problems. The arguments are simple: Faster growth means more income to be spent
on medical treatments for the old. Higher wages increase the contributions to pay-as-
you-go pension schemes, thus preventing pensions from falling. And growth reduces
the governments debt-to-GDP ratio, which facilitates and cheapens future
government borrowing.
The problem is that population aging is itself a cause for a decline in both GDP and
per-capita GDP. Due to a sustained decline in fertility, there are fewer young people
entering the labor force than there are old workers leaving it. The active labor force
declines over time, and so does GDP. In addition, as longevity increases, a reduced
labor force has to nourish more and more retirees and for longer. Accordingly, GDP per
capita tends to fall.
Innovation could come to the rescue by boosting the productivity of the remaining
labor force. If the more productive few can produce as much output as the less
productive many, GDP will not fall. Similarly, with fewer but more productive workers
in the population, per-capita GDP may stay constant. Innovation is the means;
economic growth is the end.
We studied a panel of 33 OECD countries in the period 19602012 to find out the
actual relationship between population aging and inventive activity across countries
and time. We measured population aging by the old-age dependency ratio people
older than 64 to the working population ages 1564 and inventive activity by the
number of patents per 1,000 residents.
The relationship between population aging and inventive activity turned out to be
hump-shaped, with a peak occurring at a dependency ratio between 24 and 27 older
people per 100 members of the working-age population. This is surprisingly old
such levels were reached in Japan from 19992003 and in Germany from 2001
2004. Countries located to the left of the hump may age and see their inventive
activity increase; those to the right will inevitably see it fall as they age even further.
Other studies provide some evidence that the decrease in inventive activity after a
certain old-age dependency ratio can be explained by individuals tendency to grow
less creative with age.
Our hypothesis is that on the left side of the hump necessity is the mother of
invention. To solve their age-induced problems, societies invest in innovation. Aging
populations understand at some level that their standard of living hinges on a
rising labor productivity of the working young, and they know that innovations are the
main drivers of productivity growth.
What can policy makers and entrepreneurs learn from these studies? An aging society
needs a strategy to foster inventive activity to secure its standard of living.
Germany and Japan are two aging countries grappling with this problem in systemic
ways. Germanys national innovation strategy, the so-called High-Tech Strategy 2020,
funds research and innovation at the national and state level, supporting investments
in growth areas such as green innovation, a major German strength. Japan adopted its
Comprehensive Strategy on Science, Technology, and Innovation in 2013. The focus of
this strategy is the environment, energy, health and medical care, and social
challenges. Opening to other Asian economies was also part of the strategy.
We recommend that policy makers work to raise awareness about the adverse effects
of population aging, communicating to their citizens what aging means for their
individual health care, the level of their pensions, and the economic functioning of
their government. Awareness acts as a catalyst, changing attitudes and bringing
about a societal climate more favorable to investment in innovation.