Main Demographic and Social Trends Affecting the UK Economy - Essay Example

What are the main demographic and social trends currently affecting the UK economy and other countries in Europe? Describe the macro-economic impactsof these trends and outline the types of measures that governments might take to deal with them Demographic trends in the UK and the rest of Europe The demographic trends in Europe generally is characterised by an ageing population, low birth rates, and an influx of immigrants. Falling birth rates across Europe make the average 1.5 children per couple, which is less than the 2.1 necessary to replace the existing population. Young and growing populations lie mainly in eastern and southern Europe in the relatively poorer countries. But the net effect is an overall declining population in Europe. From an economic perspective the problem is specifically the declining working population. Vladimir Spidla (2007), European Commissioner for Employment Affairs made a stark comparison that whereas “today, there are four people of working age for every person over 65, by 2050, this ration will have dropped to two workers paying for one pensioner”. The problem of population shrinkage is particularly acute in the Scandinavian countries. According to a report published in the Guardian News & Media (2008), although Germany is currently the biggest country in the EU, it is likely to shrink. France’s population is likely to grow. It is said that 14 of the 27 EU countries will “have smaller populations in 50 years’ time”. The number of older people aged over 65 roughly doubles, in the UK to nearly 19 million, as does the number of over 80 years of age in the UK. The number of deaths in the EU is expected to outnumber births from 2015. Net migration is likely to be “the only population growth factor” but only for some years after which it will be insufficient to counter negative growth. Of the bigger EU countries, the UK has the highest birth rate with 1.77 children per woman as at 2004 (Office for National Statistics). So it has a stronger population growth as compared to most of Europe. The current population of 61 million is projected to increase by 25% by 2060 (Guardian News & Media, 2008). The main causes of population decline are believed to be changes in family patterns and lifestyles such as more women being educated and working, fewer marriages and greater use of contraceptives. Ironically, rising prosperity is creating such conditions that are lowering fertility. More and more couples choose to defer having children and see them as affecting their careers. Greater immigration has been a phenomenon to counter this population shrinkage problem in Europe. This has been going on for a number of decades but a recent sharp increase is attributable to the enlargement of the EU in 2004 through relaxed border restrictions. Other social trends in the UK and the rest of Europe The changing demographics throughout Europe are making its societies more diverse and multicultural, and new pressures on its health, education and welfare systems. Greater affluence is changing the consumer focus and tastes. And, the changing world in general is bringing about changes in individual, family, community, cultural and societal values that have economic implications. For example, the breakdown of the traditional family unit, greater leisure time, rising crime, higher cost of living, urban growth, housing shortages, more women in the workplace etc. all has effects on society and the economy. Advances in information and communication technologies, medicine, and transportation especially are causing major and rapid transformation of our social and economic order. In addition, human activity is affecting our environmental detrimentally and this too has affects on the economy that need to be tackled. As far as the economy is concerned, with a notable exception of the UK, the single currency is widely in use in Europe. But, the EU is also characterised by high unemployment. In many economies in the post-industrial era, the service sector is becoming more prominent in terms of economic activity. “Globalization, technological innovation and the emergence of a knowledge-based economy are coinciding with changing family structures, shifting gender roles and an increasingly diverse society” (Diamantopoulou, 2000) Apart from the environment, there are also problems of income inequalities and poverty in Europe. “18% of the Europeans – 65 million people – live below the poverty line defined as below 60% of average income” (Diamantopoulou, 2000). Also in the UK, a major social and economic trend has been the deregulation of the labour market. This weakened the power of trade unions in the UK but it has been an effort to harmonise employment laws across the EU. Also, specific EU directives in the Maastricht Treaty granted the right to parental leave and defined the maximum working week amongst other stipulations (European Commission). These have increased rights but put limits on labour working conditions. The impact of these demographic and social trends The population trends in the European Union “could mean serious long term implications” (European Parliament, 2008). It is a major challenge for the EU and a pressure on its pension, general welfare and health systems. An ageing population leads to more pensioners, and requires greater health care costs to take care of it, and more pensions. A Eurostat report (Guardian News & Media, 2008) acknowledges problems for “pensions, health and welfare systems across much of the union” due to “the impact of population shrinkage” and its ageing population. Together with declining birth rates this means a smaller workforce that then generates lower tax receipts for the government. So, whilst on one hand there is a growing burden on the healthcare system, there are at the same time fewer people in employment to sustain this rising expense. Therefore, other sources of funding for the rising health care costs will need to be found. This is a difficulty for public finance and welfare provision, and forming acceptable fiscal policies. If little is done about this, “West Europeans will retain their fiscal burdens and rigid economies” (The Economist, 2002: 54). Given the higher population growth rate in the UK relative to the rest of Europe, the impact on the UK though is likely to be less. Increasing multiculturalism also raises a number of issues not least the question of whether it is a good development. It adds richness to the society bringing a wealth of experience, skills and entrepreneurship but the society’s cohesion is essential. The single euro currency is a major economic development in Europe. It has enabled greater macroeconomic stability and a commonality of a coherent monetary policy (Diamantopoulou, 2000). Despite this, the EU has failed to achieve high economic growth and suffers from high unemployment. Changes in the environment mean that environmental concerns will feature large in future economic policies. The changing socio-cultural values and the developments in all forms of technology too are continually shaping our world and necessitating adjustments in our economic policies. If the problems of poverty and income inequalities worsen they will cause major obstacles to social and economic progress. Social exclusion becomes a burden on sustaining welfare expenditure and the need to raise tax revenues. The macroeconomic situation and effect on national income The demographic changes in Europe are a cause of concern for issues of unemployment and economic growth in particular. “It is envisaged that EU GDP could fall by up to 1.2% between 2031 and 2050 as the population ages.” (European Parliament, 2008) The declining working population is one of the natural causes of unemployment. Aggregate demand in the economy is likely to shift to create a lower domestic output as shown in the graph below in response to such pressures as reduced consumer spending by the declining working population and higher taxes to fund rising pension, health and welfare costs. The lower output indicates that higher unemployment is likely to occur assuming immigration policies do not allow a sufficient number of immigrants to make up for the reduced available labour. Also, a smaller working population will produce less thereby putting similar pressures on aggregate supply such that real domestic output is reduced i.e. a lower GDP and a negative consequence for unemployment. Therefore, this has a downward effect on national income. The macroeconomic impact of immigration in the UK was analysed by the National Institute of Economic and Social Research (Riley and Weale, 2006). Their report “suggests that immigration during 1998-2005 contributed to a rise in real GDP of around 3 per cent”. Allowing more immigration can therefore alleviate the problem of a declining population. This contributes to an increase in the availability of labour supply and increased employment, and thereby raises potential domestic output. The EU enlargement in 2004 incorporated 10 New Member States (NMS) from eastern and central Europe. It also relaxed immigration policies. The effect has been an increase in migration flows within the EU with the UK becoming a popular destination. This has potential macroeconomic consequences for both the countries of origin and destination (Barrell, 2007). However, the long term impact on structural funds is also important to consider because this relates to the long term economic potential of the economy. This can be studied by such models as the HERMIN model. If we look at the health expenditure for example, we see that “expenditure on medical treatment has tended to rise as a proportion of national income throughout the European Union” (IST World, 2007). In the UK this proportion has been less than the EU average and there have been pressures for the UK to amend this discrepancy. An ageing population will only exasperate this rise. Macroeconomic stability depends on the strength of the macroeconomy being able to withstand shocks. The purpose of the single currency was to facilitate trade within the EU and this has changed the competitive nature of the markets in Europe. But the demographic and other social trends discussed such as “future pension issues in the context of population ageing will pose a major challenge” (Barell, 2005) for EU policy makers. Appropriate government measures To maintain tolerable levels of population growth and counter the declining birth rate, the government can encourage or make the mobility of labour within Europe easier. This would also help to reduce unemployment by minimising the distance between the people and the jobs. Advances in information and communication technologies are playing a great role in this regard so it is not entirely a case of physical mobility. Also, allowing more immigration is an option although the existing native populations consider this a controversial issue and makes governments unpopular with them. However, the problem of unemployment, in particular the shortage of a skilled workforce can be successfully tackled by permitting more skilled immigrants to come in and fill up the gaps in the job market. The UK last year (in 2008) created a scheme of tiers for immigrants to make it easier to identify, target and encourage skilled immigrants. The European Parliament too in its recent ‘Policy Plan on Legal Migration’ has envisaged a similar scheme to allow skilled immigrants to live and work in the EU. Francois Heran (2008), a leading demographic expert is in favour of immigration because it “provides a significant contribution to the renewal and strengthening of the active age population – at varied levels of qualification”. In actual fact, if it weren’t for immigration, many European countries would be experiencing a severe problem of a declining population. Alternatively, the existing populations can simply be encouraged through new birth policies to produce more children so that there is a greater balance between mortality and fertility rates i.e. the dying population is adequately replaced. For example, couples that can produce can be given tax incentives and better provisions for childcare. And, conditions can be made easier for those who would like to combine having children with working or studying. Francois Heran mentioned earlier (ibid), mentions several research studies showing that member countries in which there are developed policies for child support to reconcile family life and work have the highest fertility rates as in France. Affordable housing too is an issue so this should be given a priority so that it is easier for younger families to have the right conditions for rearing children. To deal with the consequences of an ageing population resulting in a declining working population, the government can give incentives to employers to employ people for longer so that they can continue to stay in employment, and, raise the retirement age so that pensions are received later than at present. This would control the pressures that cause unemployment and ease the demands on the working population. The rise in health expenditure due to the ageing population does not necessarily mean having to raise taxes. It is also an option to make it possible for people who are currently working to set aside a proportion of their income to fund this rising health costs and to try and keep tax rates constant in future. Conclusion The shrinking and ageing population has been described as a ‘demographic timebomb’ that could lead to ‘generation wars’ because the working population is unable to continue to support the older retired population for much longer. The potential economic implications identified and analysed above are severe and requires careful long term planning, strategies and economic policies. Moreover, the problem of unemployment is widespread in Europe, and low economic growth is expected due to the coming recession. Prolonging the working life of the existing workforce can be facilitated through the provision of training and reskilling, and dealing with the problem of ageism in the workplace. Allowing and encouraging immigration is an easy solution if the existing population is either unwilling or incapable of renewing itself. Making it easier for skilled people from other countries to come and work here is a positive step in this direction as far as the economic benefits are concerned. Spain is a good example of a country, which could not have achieved its strong economic growth without taking advantage of immigrant labour the way it has. However, more should also be done to improve the integration of immigrants in general so that they are not perceived negatively, Not all immigrants come into the UK or Europe to seek subsistence, and many of those that do integrate and work successfully make significant contributions to our economic growth. The aforementioned proposals are all means to address the shortage of labour and minimise unemployment. If handled effectively, they can lead to a position of full employment in the economy. This study has also highlighted the importance of demographics in the macro economy such as age redistribution. The other social trends such as changing values and developments in technology are inevitable features of the dynamic world we live in. These affect the economy in ways that require new thinking modifying economic policies. The focus should be on trying to harness these changes to take advantage of them for the betterment of the economy. Rather, service based industries should be encouraged because they are playing a greater role in stimulating economic growth. Social diversity does not have to cause division in society and social exclusion. Appropriate measures can be taken to homogenise this rich labour resource and make it work for greater competitiveness of the UK and other European economies. Of more concern, are the issues of poverty in Europe, income inequalities and the deteriorating environment. These are social problems that must be addressed otherwise they can seriously weaken the economy. Welfare support can deal with these problems to an extent, but the provision of work can alleviate these problems properly. This again shows the importance of the issue of unemployment, which must be given a priority by all the European governments. References Barrell, Ray et al. (2007) EU enlargement and migration: Assessing the macroeconomic impacts. National Institute of Economics and Social Research. RePEc:nsr:niesrd:292. Barrell, Ray and Davis, E. Philip. (2005) Policy Design and Macroeconomic Stability in Europe. National Institute Economic Review, No. 191. Diamantopoulou, Anna. (2000) New Social Trends in Europe. Employment and Social Affairs Commisioner, Delegation of the European Commission to Japan. Mar 7, 2000. Economist, The. (2002) A Tale of Two Bellies: The remarkable demographic difference between America and Europe. UK, Aug. 24, 2002. European Commission. (n.d.) Promoting a social Europe. European Commission publications. http://ec.europa.eu/publications/archives/booklets/move/04/txt_en.htm [15 March 2009]. European Parliament. (2008) As Europe ages – how can we tackle its demographic decline? Focus: Social Policy, Apr 15, 2008. Document ref: 20080414FCS26499. http://www.europarl.europa.eu/news/public/focus_page/047-26504-168-06-25-908-20080414FCS26499-16-06-2008-2008/default_en.htm [13 March 2008] Guardian News & Media. (2008) Europe of the Future: Germany Shrinks, France Grows, But Uk Population Booms. Buzzle.com. Aug 27, 2008. http://www.buzzle.com/articles/218815.html [14 March 2009] Heran, Francois. (2008) Qtd in European Parliament Social Policy, Apr 15, 2008. IST World. (2007) Ageing, Health Status and Determinants of Health Expenditure. IST World report. http://www.ist-world.org/ProjectDetails.aspx?ProjectId=b1fff45f82d34a4b9dc81024b497d08a [15 March 2009] Office for National Statistics. http://www.statistics.gov.uk/CCI/nugget.asp?ID=1433&Pos=1&ColRank=2&Rank=672 Riley, R. and Weale, M., (2006) Immigration and its effects, National Institute Economic Review, No 198, 4-9. Spidla, Vladimir. (2007) Qtd in European Parliament Social Policy, Apr 15, 2008. Read More