Editor's Note: In the coming year, RANE will analyze the implications of shifting demographic trends around the world. This series will be published periodically throughout the remainder of 2026; you can find all parts here.
Fertility rates dropping below replacement level — once confined to wealthy economies — have become a defining structural feature of the global system. Fertility is now well below the replacement level of 2.1 children per woman across Europe, East Asia and North America, with most advanced economies now clustered between roughly 1.2 and 1.6 children per woman and some, such as South Korea, experiencing far lower numbers. Large developing economies, including India, Brazil and Indonesia, are also approaching or falling below replacement levels, which indicates that low fertility is increasingly a general outcome of economic development and the resulting structural changes (such as urbanization, education and workforce participation), rather than a symptom of affluence or a unique condition of high-income economies. This matters because it suggests that countries will encounter demographic slowdown at earlier stages of economic development, with fewer reaching high-income status before facing aging and labor force constraints.
Global fertility has declined from approximately 5.0 children per woman in 1950 to around 2.3 today, with roughly two-thirds of the global population now living in countries below replacement level. As urbanization and incomes rise, fertility tends to fall, making delayed marriage, later childbearing and smaller family sizes increasingly common. This shift imposes structural constraints. Fewer births reduce future working-age populations, shrinking the pool of workers and taxpayers. Meanwhile, rising life expectancy — now exceeding 80 years in many advanced economies — increases the share of elderly dependents. In countries such as Japan, where nearly 30% of the population is aged 65 or older, the balance between producers and dependents has already shifted, placing sustained pressure on public finances and growth.
At the same time, declining birthrates reflect both evolving preferences and structural constraints. Urbanization, education and female labor force participation are reshaping family formation, while a persistent gap between desired and actual fertility points to economic insecurity, high housing costs and the difficulty of balancing work and family life. Across both advanced and emerging economies, survey data consistently show that individuals report an ideal family size of about two children, even as actual fertility falls well below that level. The United Nations Population Fund finds that the shortfall between desired and actual fertility is present "everywhere we look," with most individuals worldwide having fewer children than they say they want. Datasets covering more than 100 countries similarly show that the majority of women globally undershoot their stated fertility preferences and rarely exceed them.
This column will explore how countries are responding to this shift and what it means for their long-term economic and strategic position. A few countries, like France and Sweden, have achieved temporary or marginal increases, but no major economy has restored fertility to sustained replacement levels through policy alone. The core question is not whether governments can reliably reverse declining birthrates — which is assumed to be impossible — but how effectively they can manage the consequences.
Impacts of Falling Birthrates
The most immediate economic impact of declining birth rates below replacement level is on labor supply and attendant tax revenue. As smaller cohorts enter the workforce, labor force growth slows and, in many cases, turns negative over time. This reduces the number of workers available to generate output or contribute taxes, placing downward pressure on economic growth, particularly in advanced economies where productivity gains have already slowed. Over time, growth becomes increasingly dependent on productivity improvements rather than labor expansion, a transition that is uneven and difficult to sustain. Labor force contraction is already underway in many advanced economies. For example, Japan's working-age population has declined by more than 10 million since its peak in around 1995 and is projected to fall by over 30% by 2060. Italy's working-age population is projected to shrink by more than 20% over the next 25 years, with similar projections across parts of Europe absent sustained immigration.
At the same time, declining birthrates accelerate population aging, increasing the ratio of retirees to workers. This places sustained pressure on pension systems, healthcare spending and long-term care provision, all while shrinking workforces limit tax revenue growth (since pensioners' incomes are typically lower and taxed at lower rates, contributing far less to the public purse as a result and often even representing a fiscal drain). The result is a structural fiscal imbalance, reflecting the gap between a highly predictable demographic shift and the slower, politically constrained policy responses required to adapt to it, which shift spending toward pensions and healthcare and reduce fiscal flexibility, thereby increasing debt risks over time. Because aging populations also shape electoral preferences, efforts to reform entitlement systems for seniors or extend working lives via higher retirement ages often face significant political resistance. As such, aging societies tend to favor policy stability and the preservation of existing benefits, reinforcing a bias toward the status quo and slowing structural reform. At the same time, generational imbalances can intensify tensions over taxation, spending and economic opportunity, particularly where younger cohorts face higher costs of living, weaker income growth and reduced access to housing and asset accumulation. Estimates from the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) suggest that aging and shrinking workforces could reduce annual GDP growth by approximately 0.5-1.0% in some advanced economies over the coming decades. This demographic drag compounds already weak productivity growth in countries like Japan and in parts of Europe.
Meanwhile, demographic divergence is reshaping relative economic and strategic competitiveness and power. Countries that maintain or expand their working-age populations will retain stronger labor force growth and fiscal capacity, while those experiencing rapid demographic decline will face increasing constraints. These effects are not uniform, however, as productivity gains, technological adoption and policy choices can offset labor shortages to varying degrees, and industrial capacity depends as much on efficiency and capital as on the size of the workforce. This affects not only economic performance but also the ability to sustain military forces, support industrial capacity and compete for global investment, which indicates that falling birth rates will act as a persistent drag on economic growth, fiscal flexibility and national capacity. While the pace of change varies, the direction is consistent in that demographic decline will increasingly shape economic, political and geopolitical landscapes over the coming decades.
Policy Responses
Governments facing declining birthrates have pursued three main strategies, with each addressing a different dimension of the problem and carrying distinct limitations:
- Pronatal Policies: Direct efforts to increase fertility.
- Labor Force Management: Measures to expand or replace the workforce.
- Productivity Enhancement: Actions to boost output and offset demographic decline.
The most direct response has been pronatal policy, including cash transfers, tax incentives, subsidized childcare, parental leave expansions and housing support. While these can reduce the financial burden of child-rearing and influence the timing of births at the margin, their overall impact on fertility has generally been limited. Fertility decisions are shaped less by short-term incentives than by longer-term expectations around economic stability, career prospects, housing affordability and work-life balance, meaning such policies often shift births forward rather than increase lifetime fertility. Where structural constraints persist (particularly high living costs, demanding work cultures or limited childcare), financial incentives alone have proven insufficient. Indeed, OECD and U.N. studies have consistently found that economic insecurity, housing costs and work-life balance constraints outweigh the impact of short-term financial incentives. Even in countries with expanding service-based support, such as Japan, labor market rigidities and work culture continue to limit demographic impact. Across the 38 OECD economies, fertility has declined from 3.3 children per woman in 1960 to roughly 1.5 in 2022, despite decades of family support policies. Country cases reinforce this pattern. South Korea, despite implementing one of the world's most aggressive pronatal strategies, has seen only marginal improvement, with fertility rising from 0.72 in 2023 to around 0.8 in 2025. Hungary's costly family policy regime has not significantly altered long-term outcomes, while Singapore's substantial financial incentives have coincided with a continued decline, with fertility around 0.87. China has also introduced large-scale childcare subsidies, but housing costs, labor market pressures and gender inequality continue to constrain outcomes.
A second set of policies focuses on expanding or substituting the labor force. Immigration is the most immediate lever, helping sustain growth, stabilize tax bases and alleviate labor shortages. In the European Union, where deaths have exceeded births since the early 2010s, migration has almost entirely fueled population growth in recent years. Italy has issued nearly half a million work visas over three years despite political resistance. Spain has taken a more expansive approach, approving a plan to regularize roughly 500,000 undocumented migrants in part to expand its formal labor force and support its welfare system. Germany has introduced a series of reforms to expand labor immigration, including easing skilled-worker entry requirements and revising its immigration law to attract foreign labor, in response to a projected shortfall of several million skilled workers by the mid-2030s. As such, though countries facing acute decline have increasingly turned to immigration as a necessity, political and social constraints often limit its scalability. This is evident in the growing political backlash across advanced economies, where migration has become a central political issue driving the rise of right-wing and far-right parties in Europe, fueling polarization and policy tightening in the United States and, in countries such as Australia, prompting protests and increasing political pressure to reduce inflows despite continued labor demand. Even in Canada, where public support for immigration has historically been strong, rising housing and cost-of-living pressures have led to declining support for current intake levels and to calls for policy recalibration.
Governments are also seeking to increase participation among underutilized domestic groups, particularly women and older workers. Expanding childcare, promoting flexible work and reforming retirement systems can raise participation and partially offset demographic decline. In some cases, these efforts have yielded results. Female labor force participation in Singapore now exceeds 80% among working-age women, while employment among older workers has risen significantly in countries such as Germany and Japan. However, these measures face political resistance and structural constraints, suggesting they can only partially offset demographic decline. These obstacles include physical and occupational limits to extending working lives, caregiving burdens that constrain female participation, skills mismatches and institutional barriers, such as inflexible hiring practices, retirement rules and limited flexible work options.
The third approach focuses on boosting productivity to offset a shrinking workforce. Advances in automation, artificial intelligence and other labor-saving technologies can sustain output with fewer workers, particularly in capital-intensive sectors and some labor-intensive sectors, such as logistics and transportation. Demographic pressure has accelerated adoption in some cases, but gains remain uneven and require substantial capital investment, workforce reskilling and the regulatory and institutional capacity to support technology deployment at scale. Technology also cannot sufficiently substitute for labor in expanding sectors such as healthcare and eldercare. In Japan, labor shortages continue to affect most companies, despite advanced automation, while IMF analysis suggests that productivity gains and higher participation can offset only part of the demographic drag. South Korea, now the world's most robot-intensive economy, and Japan have both accelerated automation, but neither has eliminated the underlying constraint of labor becoming increasingly scarce and expensive, particularly in lower-productivity sectors where automation is harder to deploy.
These policy responses highlight that while governments can mitigate the effects of declining birthrates — often only through difficult trade-offs — they have limited ability to reverse the underlying trend. Pronatal policies struggle to overcome structural constraints; immigration supplements the labor supply but introduces political tensions; and productivity gains can offset declining worker numbers by raising output per worker but are unlikely to sufficiently compensate for sustained reductions in the workforce. As a result, even successful policy mixes lead to slower population growth, aging societies and increased competition for labor, requiring sustained adjustment rather than one-time solutions.
Diverging National Outcomes
The most important distinction going forward lies in how effectively countries can adapt to declining birth rates below replacement level, since very few, if any, will increase them back to 2.1 children per woman. No single policy tool is sufficient, so outcomes depend on how effectively countries combine multiple adjustment mechanisms under real political and economic constraints. Five factors consistently shape this: labor market flexibility, immigration capacity, participation rates among women and older workers, productivity growth and fiscal space. No country scores highly across all five, but relative performance across them determines resilience. Countries that perform well across several can offset demographic pressures at the margin and maintain economic and strategic stability, while those that do not will face increasingly binding constraints on growth, public finances and state capacity.
Countries with advantages across multiple dimensions are best positioned to manage decline. The United States stands out, combining a relatively higher fertility rate of around 1.6-1.7, continued (though recently constrained) migration inflows and ongoing growth in the working-age population over the coming decade, alongside flexible labor markets. This allows it to avoid the outright workforce contraction already underway in peer economies and preserves greater fiscal and economic flexibility, even as this advantage has become more contingent on a now-tightening set of immigration policies.
A second group relies more on institutional adaptation than demographic strength. Northern European economies such as Sweden, Denmark and Norway, along with Canada and Australia, combine immigration, high labor force participation and supportive social policies to maintain workforce size despite low fertility. Canada, for example, recorded population growth above 3% in 2023, driven overwhelmingly by migration, with Australia showing similar dynamics. However, this model depends on sustained political support for immigration and sufficient fiscal capacity, both of which face increasing strain as population growth pressures housing, infrastructure and public services.
By contrast, countries that combine low fertility with structural rigidities face significantly greater constraints. Southern Europe exemplifies this pattern. Italy, where fertility is around 1.1-1.2, faces weak labor participation (including female employment of only 50-55%), high public debt and resistance to large-scale immigration. Similar dynamics are evident in Spain and Greece, where persistently low birth rates intersect with high youth unemployment, segmented labor markets dividing secure permanent workers from precarious temporary workers and limited fiscal flexibility. These conditions constrain both labor supply and governments' ability to respond despite substantial migration inflows, given growing political resistance to that policy track.
Northeast Asia presents a distinct set of outcomes shaped by extremely low fertility and limited reliance on immigration. South Korea represents the most acute case, with fertility below 1.0 and a rapid, compressed demographic decline reinforced by rigid labor markets, long working hours and barriers to female participation. Japan faces similar pressures but has adjusted more effectively through higher participation among older workers, earlier and more gradual labor market adaptation and sustained investment in automation. The earlier onset of demographic decline has also given Japanese institutions more time to adjust.
China occupies a unique intermediate position. It faces a shrinking working-age population and rapidly aging society, while retaining strong policy implementation capacity, control over credit allocation and a large industrial base that supports continued investment and relatively elevated growth. China's challenge lies in managing adjustment under less favorable demographic conditions than those that supported its high-growth period from the 1990s through the early 2010s, when GDP growth frequently exceeded 8-10% and was driven primarily by rapid productivity gains supported by a large and expanding labor force. Entering demographic decline before reaching high-income status compresses the adjustment timeline, eroding labor-intensive advantages and increasing reliance on automation and capital as productivity growth slows. Aging will weigh on consumption and increase fiscal pressures, while elevated youth unemployment highlights persistent labor market mismatches despite tightening labor supply, underscoring that skills and qualifications matter in addition to the overall size of the labor pool.
Southeast Asia sits between demographic momentum and emerging decline. Fertility has fallen rapidly, with Thailand well below replacement and Vietnam near or slightly below 2.0, while Indonesia remains near replacement but is trending downward. Working-age populations continue to grow due to demographic momentum, creating a limited window to capture a demographic dividend, with labor supply projected to peak across much of the region in the 2030s before gradually declining. Meanwhile, the working-age share of the population is already beginning to plateau or fall in some countries. Given these conditions, Vietnam has leveraged integration into global manufacturing to absorb labor, while Indonesia and the Philippines retain larger demographic buffers but face constraints related to job creation, informal labor and productivity. Thailand, already aging rapidly, is closer to the Northeast Asian trajectory.
By contrast, parts of South Asia and sub-Saharan Africa will continue to see strong growth in working-age populations. India — which became the world's most populous country in 2023, according to the United Nations — is the most consequential case, where fertility has declined toward replacement, but a large youth cohort ensures continued labor force expansion. Pakistan and Bangladesh share similar dynamics, though both face constraints on job creation and labor-market formalization (similar to some Southeast Asian cases). In sub-Saharan Africa, countries such as Nigeria, Ethiopia and the Democratic Republic of the Congo are projected to drive more than half of global population growth through 2050, with Nigeria alone projected to exceed 375 million people. These regions will supply the majority of new entrants to the global workforce, reshaping labor supply, migration pressures and economic geography. However, without sufficient job creation and institutional capacity, this demographic momentum can translate into underemployment and instability rather than sustained growth.
The Upshot
Demographic decline is highly persistent and very difficult to reverse, and policy can only moderate its effects at the margins. Instead, policy will differentiate countries by amplifying their existing strengths and weaknesses. Consequences will vary sharply, making demographics a key faultline shaping growth, fiscal capacity and ultimately, with productivity and innovation, long-term competitiveness. A hierarchy of adaptation will thus emerge, with countries that combine immigration, higher labor force participation, productivity gains and fiscal flexibility best positioned to manage demographic pressures through fiscal adjustment, labor market policy and investment.
However, demographic growth is not always an advantage; its economic benefits are tied to a time-bound "sweet spot" in which a rising working-age population supports growth, but countries move through this phase at different speeds, with some exiting it as others enter. Over time, differences in both fertility rates and the capacity to absorb and employ labor will compound. Slower labor force growth will feed into weaker economic expansion, tighter fiscal space and reduced strategic flexibility, reinforcing divergence rather than convergence. In that sense, demographic decline is less a universal constraint than a differentiating force, increasingly defining which countries can sustain economic output, generate revenue, borrow at scale and mobilize capital and labor for strategic objectives, and which will see these capacities steadily erode. Demographic resilience — or the ability to manage low fertility pressures through a combination of sound immigration, labor, technological and fiscal policies — will, in turn, become a key component of national competitiveness in an environment where population growth can no longer be taken for granted.
