Declining Birthrates Challenge Economic Growth: McKinsey Highlights the Way Forward

A recent report from the McKinsey Global Institute (MGI) has drawn attention to the economic difficulties created by declining birthrates in advanced economies. The report emphasized that to sustain historic growth rates, countries must either extend the average working hours or increase labor force participation. These measures are particularly urgent in regions grappling with rapid demographic aging.

South Korea, which faces one of the lowest fertility rates in the world at just 0.7 children per woman, stands out as one of the most affected nations. The report indicated that South Koreans would need to work an additional 3.4 hours per week to maintain economic growth—second only to Spain, where workers would need to add 4.7 hours weekly. Currently, South Koreans work an average of 38.8 hours per week, according to data from Statistics Korea.

The MGI report, titled Dependency and Depopulation? Confronting the Consequences of a New Demographic Reality, was published on January 15. It concluded that maintaining the growth rates achieved between 1997 and 2023 would require a doubling of current productivity growth levels. Aging populations—who generally work fewer hours—are a major driver of declining productivity, particularly in countries experiencing severe demographic shrinkage, such as those in Europe, Northeast Asia, and China.

The report forecasted that average weekly working hours per capita in 10 major aging economies, including the United Kingdom, Germany, Japan, and China, would decline by 2.2 hours by 2050. This drop in working hours would likely reduce annual GDP growth by approximately 0.4 percentage points per capita. Aging economies are expected to face sustained headwinds as the shrinking workforce limits economic output.

MGI further elaborated that the shift in population age structures would dampen economic productivity over the next 25 years. It projected that GDP per capita growth would slow by 0.4% annually across most “first wave” aging regions, excluding North America. This slowdown is equivalent to a cumulative reduction of 2.2 working hours per capita per week from 2023 to 2050, varying between 0.8 and 2.6 hours depending on the region.

To mitigate these demographic challenges, the report recommended increasing average weekly working hours across these economies by 2.2 hours by 2050. South Korea, due to its particularly acute aging crisis, would need workers to contribute 3.4 additional hours weekly to counteract the economic impact of its declining population.

Another proposed solution was increasing labor force participation, especially among older age groups. Japan was cited as an example, where the labor force participation rate for individuals aged 65 and older stands at 26%, a stark contrast to France’s rate of just 4%. This higher participation rate has contributed to Japan’s relatively strong average annual labor productivity growth of 1.1% since 1997, outperforming Western Europe’s 0.8%.

However, the report cautioned that this strategy has its limitations. In Japan, workers aged 65 and older average only seven working hours per week, compared to 30 hours for those aged 25 to 64. This discrepancy underscores the unavoidable impact of aging on total workforce productivity and highlights the difficulty of maintaining growth in economies with shrinking labor pools.

The report makes clear that declining birthrates and aging populations represent a significant threat to economic stability, and addressing these challenges will require comprehensive strategies. From increasing working hours to better integrating older populations into the workforce, nations must adopt bold measures to adapt to a rapidly changing demographic landscape.

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