Ageing population tipped to hit manufacturing hardest

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Manufacturing is the sector most likely to be challenged by an ageing population, a new report by the New Zealand Institute of Economic Research says.

In a report on the implications - positive and negative - for firms as the population ages, the institute says manufacturing firms would tend to be harder hit than firms in the services sector, as a result of being comparatively labour intensive and exposed to international competition, and because demand for their output tends to be more sensitive to price.

The report found that as the workforce shrinks as a share of the population the impact would vary by region and by industry.

"We are already seeing employment tail off in the export manufacturing sector. That is set to continue," the report's author, Dr Kirdan Lees, the institute's head of public good research, said.

"Industries will need to move away from making goods and competing on cost and get better at competing in niches using specific expertise that is hard to replicate."

By contrast, "Services tend to be more price-inelastic, that is, customers inevitably absorb most of the increasing costs of these services rather than switching to other types of goods. This means that firms shouldn't be greatly concerned with the need to pay higher wages and should raise prices to match."

Firms would need to think hard about how to retain the knowledge, experience and skill sets of older workers, Lees said.

"Currently, about two-thirds of the skills built up in the labour force simply replace skills lost through death or retirement. But this will rise. That means a long-term slowing of the accumulation of human capital - a determinant of income and wealth."

Education levels are already high, relative to other developed countries, so meeting the demand for skill is likely to be more about matching training to jobs and the adaptability to deal with change, rather than boosting the general level of education in the workforce.

But as ageing is also a challenge for many countries richer than ours, "competition for skilled workers, who are increasingly mobile ... will intensify, pushing up wages."

"If the environment for producing labour-intensive goods is challenging now, higher wages make that environment look even tougher."

The ageing population would also change the demand side of the economy, Lees said.

Large-scale surveys of household expenditure have found that spending on necessities like food and clothing is relatively flat across age groups but spending on health and insurance increases with age.

But those effects are themselves shifting: when it comes to consumption, today's 60-year-old is not the same as the 60-year-old of yesteryear.

And the data suggest that as the population ages demand for cars is likely to rise, rather than fall. "Even though older people drive less and hold on to cars longer than younger people, older couples tend to purchase second cars."

The report concludes that firms which invest in understanding the subtleties of demographic change will be better placed to address its challenges.