Demographics

The population structure has strong implications for the economic future of any country. As an example, let us use my home country, Germany (Table 1). Germany is an aging society. In the next 10 years the bulk of the boomer generation, consisting of 13 million people who were between 56 and 65 years old in 2025, will retire. Only 8 million young people will enter their working-age years. That is, assuming no major change in migration and retirement age, the working-age population will shrink by 5 million ≈ 10% in the next 10 years.  

In developed economies, GDP is more or less proportional to the size of the working-age population, everything else being equal (productivity, participation rate, ...). Whether the population will actually shrink depends on ongoing migration. Besides the 12 million with foreign citizenship, of the 71 million people with German citizenship, 14 million have a migration background ^*1. 9 million of these people were born in another country. 5 million of them are second-generation migrants, meaning they grew up in Germany as children of migrants, but have never lived in their parents' home country.

Migrants typically move to another country if they can no longer bear the situation in their home country and expect to live a safer and/or more prosperous life elsewhere. Whether they are welcomed by the native inhabitants and how quickly they integrate into the economy and society are open questions all over the world. Problems typically escalate and lead to unpleasant results when the economy or security situation in the new country suddenly deteriorates. Germany and some other European countries may reach that point in the not so distant future ...

Let us further analyze the structure of Germany's workforce (Table 2). Including self-employed people, 33% of the total population are working full time. 18% are only working part time or in marginal jobs that cannot fully cover their living expenses. The remaining 49% do not work because they are retired, too young or due to some other reason.

Simplifying a bit, we can say that one person working full-time supports two other persons directly (as members of their household) or indirectly (via taxes and social security contributions, examples in Table 3). And most likely more in the future, as discussed above.

The situation looks even worse when we analyze employment across the sectors of the economy (Table 4). At the core of each economy sit those industries that manufacture and produce physical goods, with the infrastructure, logistics and transportation sectors directly supporting the operation of the production sector. In economic terms, these 20% of the total population create economic value. The remaining sectors of the economy, no matter how important they may be for our daily life, are non-productive in economic terms and only consume value.

Is it justified to blame sectors of an economy as consuming value, which others generate? The background for this distinction is that most countries are not self-sufficient. Germany, for example, must import nearly all the fossil fuels for its primary energy, the solar panels and wind generators for its clean energy transition, raw materials like iron ore, copper, or nitrogen, computer and telecommunication hardware, military products like air defense systems, many consumer products like clothes and even part of its food. To pay for such imports, a country must generate foreign income. There are three possible ways to achieve this:

1. export natural resources,
2. export industrial goods (and services), or
3. export its people.

Without natural resources alternative (1) is not feasible and alternative (3) is nothing any nation would like. For alternative (2) to work, a country's products must be competitive on quality and price. Most countries (maybe with the exception of the U.S. ^*3) do not have a competitive quantity or quality of services to export. Thus they can only export physical goods coming from their production sector. Most physical products nowadays have a worldwide market, i.e. products are only bought if their quality is good enough and their price must be similar or lower than that of your competitors.

If we analyze the price and cost structure (Table 5) from materials and other input costs over development and production up to distribution and sales, we find 3 generic forces defining overall costs:

• Labor cost, which includes direct wages and salaries of the company's employees plus everything that the government imposes on top such as employer social security contributions. In Germany, for a company these additional costs add 60% or more to their total labor cost ^*4. To make things worse, the employees have to pay income taxes and their own share of the social security contributions. In Germany,  these "fees" can reduce their salary by up to 50% ^*5. Thus, only less than a third of what the company has to pay for labor, typically goes to the employee, two thirds or more end up in the pockets of the government or its institutions. 
• Infrastructure cost, which not only includes manufacturing equipment but also manufacturing and office sites plus respective taxes ^*6 and financing costs.
• Energy cost for operating manufacturing plants, transportation and cover environmental regulations such as carbon certificates. In Germany, one third (electricity, natural gas) up to two thirds (gasoline) of energy costs are taxes or other kinds of government imposed fees ^*7.

To make a product or service more competitive, the only factors which managers can directly influence are labor cost by increasing automation (think robots and AI) or moving the company to a country where labor, taxes and regulatory costs are cheaper.

Germany's economic strength historically came from its large automotive, machinery, electrical and value-added chemical industry. But the economic model of the country is under pressure due to its high energy prices, wages, taxes, social security contributions, environmental and other regulations which make biotechnology and pharmacy, battery cell production, artificial intelligence or other modern industries economically difficult. Problems converting scientific research results and inventions outside of its old industries into successful businesses and the described demographic trend do not help either.

Society and politicians must understand the overwhelming importance of a productive economy for the wealth and stability of their nation. In a global economy each country and its workers compete with other countries and their workers worldwide. If a country is not competitive, managers whose primary job is to keep their companies profitable will continue to move their business to countries where they see more favorable conditions. Not because they want to, but because they must if their company is to survive ...

Notes:

^*1 Methods for population statistics based on citizenship, place of birth and origin have changed over the years and differ between countries. For details on how destatis.de collects this data, see here and here.

^*2 Methods for labor statistics differ between OECD and countries, sometimes even between different institutions in the same country. For details see here.

^*3 Companies like Google, Microsoft, Meta, or Amazon generate most of their revenue from services, not physical products. And maybe Washington now even sees the U.S. Military as a security service provider which should be rented by NATO or others.

^*4 ~66% additional costs paid by employers on top of salaries:

• 23% of employee's gross salary for pension, health, long-term care and unemployment insurance (employer's share of social security contributions, in Germany employers and employees each pay 50% of the social security contributions). Likely to rise due to an aging society.
• 5% contributions for parental leave, insolvency benefits, continued pay during sick leave, accident insurance
• 8% benefits under a collective bargaining agreement between companies and unions (vacation pay (Urlaubsgeld) and year-end bonus (Weihnachtsgeld), typically one monthly salary)
• 30% to account for actual working time: 52 weeks paid per year - 2 weeks public holidays - 6 weeks vacation - 4 weeks sick leave and training = 40 weeks effective working time   

Sources:

• https://www.destatis.de/DE/Themen/Arbeit/Arbeitskosten-Lohnnebenkosten/_inhalt.html
• https://www.personio.de/hr-lexikon/lohnnebenkosten/
• https://www.destatis.de/DE/Themen/Arbeit/Arbeitsmarkt/Indikatoren-Qualitaet-Arbeit/Dimension-3/woechentliche-arbeitszeitl.html

^*5 ~44% deductions paid by employees from their gross salary:

• 23% of employee's gross salary for pension, health, long-term care and unemployment insurance (employee's share of social security contributions)
• 21% income tax (single with median income 4500 €/month), German tax code with progressive structure, i.e. higher percentage for higher income.

And not to forget: When employees buy things with their net income, they pay another 7% to 19% in Value-Added-Tax to the government ...

Sources:

• https://magazin.comdirect.de/finanzwissen/vorsorgen-und-versichern/durchschnittseinkommen-in-deutschland
• https://www.finanzfluss.de/ratgeber/schichtenmodell/

^*6 ~21% company taxes on company net income (including non-profitable companies):

• 4% local business tax (Gewerbesteuer)
• 17% corporate income tax (Körperschaftsteuer)

Source:

• https://www.destatis.de/DE/Themen/Staat/Steuern/Unternehmenssteuern/_inhalt.html#245620

^*7 Sources for energy price components in Germany:

• https://www.destatis.de/DE/Themen/Wirtschaft/Preise/Publikationen/Energiepreise/statistischer-bericht-energiepreisentwicklung-5619001.html
• https://www.verivox.de/strom/themen/strompreiszusammensetzung/
• https://www1.wdr.de/daserste/maischberger/faktenchecks/maischberger-2084.html
• https://www.destatis.de/DE/Themen/Wirtschaft/Preise/Erdgas-Strom-DurchschnittsPreise/_inhalt.html

Due to state subsidies some industry prices may be slightly lower than prices for private households.

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