China released its latest population figure for 2022, recording a year-over-year decline, which had not been seen since the Great Leap Forward in the early 1960s. Population growth is important for economic growth because all outputs are produced by labor and capital (non-labor), the two standard input factors. Given a production function in terms of these factors, its change over time (equivalent to roughly GDP growth) will be proportional to the change of these input factors over time. Part of the latter is population growth.
As the output is linked to capital and labor components this way, studies suggest China’s labor share has roughly been near 0.6. Although the share involves price (which is wage) and quantity (which is labor amount) subcomponents, only the latter can provide sustainable growth as (wage) inflation cannot grow indefinitely for a given set of labor supply and demand factors. The over-half share is saying population growth would be relatively more important than machinery in production. This is intuitive as the “worlds factory” is still highly labor-intensive.
Aging is a problem faced by most countries as baby boomers retire everywhere. While mortality is uncontrollable, institutions and policies can alter the positive side of population growth, namely, birth and immigration. Poor communities tend to have higher birth rates, which has been well documented in economics and evolution biology. However, China did not benefit from this thanks to her decades-long one-child policy. There had been a prolonged period of strong pregnancy desire, yet the government employed all cruel means to destroy it.
Institutions and policies also created prolonged net emigration thanks to suppressive dictatorship. This has already become a trend, a custom, or a gene of most Chinese people. Even for those who do not move, the exodus is already deeply rooted in their minds.
To see the impact, the accompanying chart plots the relationship between population and real GDP growth from 1961 to now. Also shown is Japan’s locus, where China is stepping on her footprint; both loci move from right to left. The general idea is when population growth is above 1.5 percent, it does not harm economic growth, but below that, as population growth falls, so will GDP growth.
The idea behind this lies in the production function, which employs a more or less fixed share of capital and labor. Any increase of one-factor input (either capital or labor) will not boost output, but the reverse is not true, as a shortfall of either can prevent production from happening.
China’s population growth peaked in 1987 while GDP growth peaked in 2007, that is, with two decades lag. This time gap is roughly the period from birth to becoming part of the workforce. Even if population growth stops declining, it will take another two decades to stop the downtrend in GDP growth. Of course, this refers to the trend growth; other factors can drive the numbers up and down. Yet short-term improvement does not mean the long-run downtrend is reversed.
