Skills are replacing age-based labor supply as the engine of economies

Drawing on detailed data from 336 cities between 2000 and 2020, the research shows that China’s long-standing demographic advantage, once powered by a large working-age population, has been steadily overtaken as the primary driver of growth by a new engine: the skills of its workforce.

“For decades, economic growth benefited from having many working-age people compared to children and older adults. But as populations age, this advantage is fading. We needed to understand what comes next, and whether growth can still continue,” explains lead author Hengyu Gu, Assistant Professor at Nanjing University.

The research was driven by a broader effort to assess whether China can sustain economic growth as its population ages and the workforce shrinks, and to identify what will underpin that growth in the future. It also examined the extent to which improvements in workforce skills can counterbalance the long-term economic pressures associated with demographic change.

The study findings point to a decisive turning point. China’s age advantage reached its peak around 2010 and has been declining since, signaling a shift away from growth driven primarily by the size of the labor force. At the same time, improvements in the skill composition of the workforce have continued, becoming an increasingly important driver of economic expansion. The analysis also shows that these two factors interact, with a more favorable age structure enhancing the economic returns to workforce skills. Together, these findings support a broader global insight: the next phase of economic growth will be defined less by the size of the workforce and more by what that workforce can do.

The authors introduce a novel way of measuring workforce skills, capturing not just education levels but the actual tasks performed in jobs across cities. This approach allows the study to better reflect the skill content of local labor markets and to quantify how the balance between high- and low-skill tasks contributes to economic growth.

“The key question was whether China can keep growing as its population ages and the workforce shrinks, and what will drive that growth in the future,” says coauthor Yingju Wu, a PhD candidate at Nanjing University.

This shift reflects a fundamental transformation of the demographic dividend into a skill-based one and has implications for policymakers worldwide, highlighting that sustaining economic growth will depend less on increasing population size and more on prioritizing the improvement of workforce skills while adapting to changing demographic structures.

“Aging does not end the demographic dividend. It changes it into a skill-based one. This means the future of growth is not about how many workers you have, but how skilled they are,” emphasizes Guillaume Marois, a senior research scholar in the Multidimensional Demographic Modeling Research Group of the IIASA Population and Just Societies Program and coauthor of the study.

“Population aging does not have to mean economic decline, if countries invest in skills and productivity. Policies should focus less on increasing population size and more on improving workforce skills,” concludes Wolfgang Lutz, Distinguished Emeritus Research Scholar in the IIASA Population and Just Societies Program and the Institute’s Sherpa for Asia.

Reference 
Gu, H., Wu, Y., Marois, G., Lutz, W., Niu, T. (2026). China's demographic dividend has moved from age-based labor supply to skill-based productivity. Proceedings of the National Academy of Sciences (PNAS) DOI: 10.1073/pnas.2532906123