Increase in the Labor Force Can Be an Engine for Development

The rising size of the global workforce presents an opportunity to drive economic expansion and increase gross domestic product (GDP), but it also presents many challenges, according to new research by the Worldwatch Institute for Vital Signs Online. About two-thirds of the world's population, or 4.6 billion people in total, are of working age in 2011, the highest share in the last 60 years. The United Nations projects that the potential labor force will continue to grow through the second half of the century.

"This development will have important implications for the world economy," said Elizabeth Leahy Madsen, an independent consultant who conducted the research for Worldwatch. "Many developing countries will face the challenge of expanding their labor markets to provide jobs for a growing workforce. Meanwhile, industrialized countries will face important policy decisions about productivity in an aging workforce and about their openness to migration."

Industrialized countries are home to only some 16 percent of the world's potential labor force, but they produce more than two-thirds of global GDP, according to Madsen. Meanwhile, nearly a quarter of the world's potential labor force lives in South Asia, yet that region's share of the global economy is a little over 3 percent. The potential labor force in developing countries is projected to grow by an average of 39 percent within the next 40 years.

"A vital labor force is an asset, but when its proportion is too high relative to the rest of the population, low wages and unemployment become a risk," said Robert Engelman, President of Worldwatch. "Innovative governments and societies can mitigate that risk by fostering sustainable jobs that offer good wages and working conditions. This is easier to accomplish where rights-based population policies encourage balanced age distributions, and where sound health and education policies improve employment potential."

In 2010, the number of unemployed people in the world reached 205 million, a global unemployment rate of about 6 percent. Poor job prospects in developing countries often trigger migration among rapidly growing working-age populations as people search for work in other countries. International migrants account for 10 percent of the total population of industrial countries, which have seen a 55 percent increase in the number of migrants since 1990.

The age structure of a country's labor force depends primarily on the fertility rate followed by the rate of migration. While the decline in fertility rates is leading to an aging population in industrial countries, inward migration can have a mitigating effect on this development. Madsen analyzes the different patterns of change in the potential work force for different countries as follows:

• China: About 1 billion people are of working age, and 74 percent of all adults are active in the labor force. The potential labor force has doubled in size since the early 1970s but will decline in the future due to a rapid fall in the fertility rate from nearly three children per woman in 1980 to 1.6 children today. Even if fertility rates increase slightly, China's economy will be powered by a potential labor force that is nearly 20 percent smaller by 2050.

• India: The world's second largest country will surpass China as the world's largest population in about 10 years, with a fertility rate of more than 2.5 children per woman, although fertility rates are falling. Some 800 million people, 64 percent of the population, are of working age, a number that is likely to increase and may push economic growth. India's labor force participation rate is low at 58 percent, however, due to the fact that just one-third of women work outside the home.

• United States: If U.S. fertility rates stay at replacement level, the potential labor force is projected to grow slightly. The fact that the country is home to the highest number of international migrants in the world also has an impact on this development. Similar patterns of change in the labor force can be observed in other industrialized countries.

• Uganda: With over six children per woman, Uganda has one of the world's highest fertility rates, and nearly half of the population is younger than 15. If these numbers remain high, as they have for decades, the country will need to generate more than 1.5 million new jobs annually by the late 2030s. In 2009, only some 100,000 new jobs were created in Uganda.

Faced with these projections, many policymakers in industrialized countries have expressed alarm about healthcare and pension system costs for an aging workforce. But policies that promote an extension of working years for healthy and productive older adults may help offset the economic consequences of demographic change.