One of the most important demographic developments of the last 50 years in Western Europe, North America and Australia has been the large swings in birth rates. Britain experienced these birth rate fluctuations, as well as declining death rates, changes in the age at marriage, the incidence of divorce and of cohabitation without legal marriage. In Discussion Paper No. 44, Research Fellow John Ermisch examines the economic implications of these demographic developments.
Birthrate fluctuations have obvious and important implications for investments in human resources, particularly through the educational system. Such fluctuations create important problems in adjusting the supply of teachers and they also affect the quality and cost of education. The size of the generation to which a person belongs may affect their opportunities for pre-school human capital investments. It can also affect their willingness to pursue additional education after the school-leaving age.
Large generations are also likely to suffer lower lifetime earnings, Ermisch argues. In Britain, young workers of the 1960s "baby boom' generation have entered the labour force in large numbers, increasing the supply of inexperienced labour to the economy. How has the labour market adjusted to the influx of young workers? The main effect has been on their ability to find a job, rather than on their wages relative to older workers. The entry of this large generation into the labour market has produced a large increase in young people's unemployment relative to that of older workers.
The supply of young workers will decline over the remainder of the 1980s, and Ermisch argues that this will moderate the downward pressure on young people's earnings and on their employment prospects. Members of the small generations born during the 1970s and 1980s can look forward to a brighter earnings future. Ermisch also draws attention to the substitutability in employment between women and young people. The growth in the numbers of women in paid employment and changes in their relative earnings have therefore had a important effect on the earnings and employment experiences of young people.
The rate at which new households are formed is affected not only by changes in the age distribution of the population but also by economic growth and housing market developments. During the 1960s, changes in the population's age distribution contributed less than 40 per cent of the growth in households. This contribution rose to 65 per cent during the 1970s, due partly to a rise in the age of marriage, but also to slower economic growth and less favourable housing market developments. Ermisch forecasts an acceleration in household formation during the 1980s but predicts that it will fall to historically low levels during the 1990s. The growth in the percentage of households with only one member is likely to continue to increase during the 1980s and 1990s, but at a decelerating rate. Nevertheless, Ermisch warns that the current pattern of housing may not adapt rapidly enough to this changing household structure.
Demographic pressures on health services and personal social services will increase during the remainder of the century, but not at an alarming rate, according to Ermisch. The rate of increase is no greater than experienced in the past, and it will probably be less. The pressure from the rise in the numbers of very elderly will be partly offset by reduced demand for these services from people of other ages.
A much more worrying development is the projected rise in the required contributions to the state retirement pensions system in Britain. During the first three decades of the next century the contribution rate is likely to increase very rapidly. This will significantly reduce the growth rate of real disposable earnings, by about 0.4 percentage points per annum. The contribution rate would reach 30 per cent of earnings around 2035 under the present pension scheme. Ermisch argues that adjustments to the pension scheme should be made immediately. If this is not done, the expectations of the "baby boom' generations concerning their retirement income may be disappointed just as they are about to retire. The present scheme promises to be very costly in future. It is also unfair, in that it requires our children to pay us much higher pensions relative to earnings than we are willing to pay our own parents.

Economic Implications of Demographic Change
John Ermisch

Discussion Paper No. 44 (HR)