Embracing an Ageing Workforce

22.03.19
Written by Richard Hokenson 

When considering demographically related investment issues, a long-held maxim of mine (Hokenson & Company) is that one can react to what is happening now or consider what will happen next and be positioned to take advantage of the foresight. The usual demographic focus for industries or companies is to emphasise the demand side for specific goods or services. Increasingly, however, there is the need to focus on the demographics of the supply side, specifically a company’s workforce. All major countries face an ageing and, in many instances, a declining pool of workers. Are companies aware of the changes that will occur? Are they taking any actions now to consider what the ramifications might be? Or do they end up being potentially overwhelmed by the changes as they occur? The following focuses on several companies in Germany and some comments regarding America.

It should not be a surprise that Germany is at the forefront. Since 1972, there have been more Germans dying than being born. They face the prospect of losing nearly 6 million persons of working age in the next 10 years. Before more than one million migrants changed the arithmetic, 2019 was expected to be the first year ever in which workers 60 years old and over would outnumber those younger than 30. Moody’s has already warned them that if Germany were to ever lose its triple-A credit rating, the likely reason would be the impact of demographic change on the German economy and its social security system.

A major issue is whether or not older workers are less productive. Estimating age-productivity profiles is a complex task. For example, more productive firms are usually more profitable – they expand and increase their workforce. Most of the new hires, of course, are young. If one were to relate productivity to the age of the workforce, it would result in a spurious negative correlation between productivity and age.

A more stringent test of age and productivity are the results of the performance of a German truck assembly plant as reported by Borsch-Supan (2013). Unlike many service-sector jobs, the assembly plant requires more physical strength (which tends to decline with age) than experience (which tends to increase with age). This is a setting which would supposedly confirm declining productivity with age. It does not. Productivity actually increases monotonically up to the mandatory retirement age of 65 (see Chart 1).

Borsch-Supan then states:

We conclude that even in a work environment requiring substantial physical strength, its decline with age is compensated by characteristics that appear to increase with age and are hard to measure directly, such as experience and the ability to operate well in a team when tense situations occur, typically when things go wrong and there is little time to fix them. While younger workers are of course different from older ones, in terms of productivity, the differences seem to even out.

His findings are also echoed by Mahlberg et al (2013) which states that “we are not able to discern a generally negative association between the share of older employees and labour productivity”. And, as pointed out in Bloom (2013), there is no evidence that older workers are overpaid relative to their productivity.

The second example is labelled BMW2017. Very aware that their workforce was getting older, in 2007, BMW contemplated what an assembly line might look like in 2017. The only major change that they made was to invest €50,000 in shoes that were designed to make it easier for older employees to stand for several hours at a time. It turns out that this assembly line had the highest productivity in the plant.

The third example is Porsche which was featured in the Financial Times (2019):

In their ergonomically designed swivel chairs, these workers are playing a small part in a wider far-reaching drama as Germany plc tries to prove to worried politicians and shareholders alike that the country’s economy will not be at risk when millions of baby boomers retire in the coming decade.

Porsche has mapped out the entire Leipzig factory with a traffic-light system indicating ergonomic comfort, so managers can schedule shifts in such a way that the same body parts are not overburdened.

The aim of ergonomics is not to react but to be preventive.

The challenge for Germany plc is to take the risk of an ageing society and transform it into an opportunity to reap what consultancy Deloitte calls “the longevity dividend” – being able to benefit from the productivity of older employees.

The results for America are less encouraging regarding ageing baby boomers. A recent article in the Washington Post stated that “…their retirements are taking companies by surprise.” The results are not totally discouraging as about 40% of companies surveyed are considering offering part-time work or flexible hours which is nearly double the current rate. Many employers expressed concern that they face significant uncertainty as to whom or what will replace a retiring boomer, i.e. finding workers with similar knowledge and skills.

References
Bloom, David E. and Sousa-Poza, Alfonso, “Ageing and Productivity: Introduction”, Program on the Global Demography of Aging Working Paper No. 98 (January 2013).

Borsch-Supan, Axel, “Myths, Scientific Evidence and Economic Policy in an Aging World,: The Journal of the Economics of Ageing 1-2 (2013): 3-15.

Mahlberg, Bernhard, Inga Freund, Jesus Crespo Curaesma and Alexia Prskawetz, “The Age-Productivity Pattern: Do Location and Sector Affiliation Matter?,” The Journal of the Economics of Ageing 1-2 (2013): 72-82.

McGee, Patrick. “Germany invests to prolong employee’s working lives”.

Van Dam, Andrew. “Baby Boomers upend the workforce one last time.”

  

 

This update was researched and written by Richard Hokenson, as of 22 March 2019

 

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