Many countries, especially in Eastern Europe and East Asia, are struggling with the same problem: Their populations are getting older and older, with fewer and fewer young people coming along – and with corresponding consequences for the economy and pension systems. However, there is one factor that has so far received little attention in this discussion: When women have fewer children, these children are statistically more highly educated and healthier. “This also increases the human capital of these children," explains Klaus Prettner, Professor of Macroeconomics and Digitalization at WU Vienna. "In addition to all the desirable effects that higher education and better health have on children and society as a whole, this also has a positive economic impact.”

But to what extent can the increase in human capital compensate for a declining population? Klaus Prettner and his colleagues Martina Siskova, Michael Kuhn and Alexia Prskawetz have investigated this in more detail. They used several methods to measure the average human capital in different countries and compared this data with figures on fertility, population size and various economic indicators.

A small but clear effect

The result: If a country's fertility rate (i.e. the average number of births per woman) falls by 1%, this is accompanied by an increase in average human capital of 0.124%. In other words: “Education and health can compensate for falling birth rates – but only partially,” says Klaus Prettner.

In their calculations, the WU researchers also took into account another factor that should not be overlooked in discussions about falling birth rates: migration. Many countries that are experiencing falling birth rates are also struggling with emigration – especially of people with a high level of education and the corresponding human capital. In Eastern Europe in particular, the combination of these two factors is a growing problem.

However, migration complicates the calculations: if someone emigrates from Eastern to Western Europe, for example, this is not a zero-sum game and human capital does not simply shift one-to-one from one country to another: “The destination countries of migration are usually rich countries with a correspondingly high level of education,” explains Klaus Prettner from WU. “If people who have an above-average level of education in their country of origin emigrate to countries where their level of education is ultimately below average, this would mean that the average human capital in both countries would fall.”

No solution for a shrinking population

In order to shed more light on this correlation, the researchers examined the 50 countries with the greatest population decline separately. They found that more education and better health have a smaller effect: If migration is taken into account in the calculation, for every one percent by which the fertility rate falls, there is only a 0.054% increase in average human capital. The increase in human capital can therefore only compensate for about one twentieth of the population decline. Klaus Prettner: “This shows that countries with shrinking populations are currently in a difficult position.”

And what do the results mean for Austria? On the one hand, Austria’s fertility rate is falling, on the other hand the population is increasing due to migration – including from countries in Eastern Europe. “For countries like Austria, which are experiencing high levels of immigration, it is particularly important to invest in the education and continuing education of these migrants and their integration into the labor market.”

Detailed results and further information

Siskova, M., Kuhn, M., Prettner, K., & Prskawetz, A. (2023). Does human capital compensate for population decline? The Journal of the Economics of Ageing, 26, 100469.
Link to the paper