Introduction: In various towns where mills were once the backbone of the economy, significant changes are taking place. Many are experiencing population declines, raising concerns about the future of these communities. This article explores how depopulation and aging are impacting regions, with a specific focus on Japan’s unique situation.
Yves here. Several mill towns, including those I called home where mills played a crucial role in employment, have witnessed a shrinkage in population, although they haven’t turned into ghost towns yet. For instance, Escanaba, MI had over 15,000 residents in the 1970s but now falls below 13,000. Similarly, Chillicothe, Ohio has seen its population drop from 29,000 in the ’70s to under 22,000 today. In terms of aging, it’s hard to surpass Bailey Island, Maine, where my father’s family settled initially; the median age there is now 59. Cranky Yankees!
By Elisa Giannone, Junior Researcher Center for Research in International Economics (CREi): Yuhei Miyauchi, Assistant Professor of Economics at Boston University; Xinle Pang, Assistant Professor of Economics at the University at Buffalo; Yuta Suzuki, Antai College of Economics and Management at Shanghai Jiao Tong University; and Nuno Miguel Marques da Paixao, Senior Economist at the Bank of Canada. Originally published at VoxEU
Discussions surrounding aging and declining populations often view the issue as a nationwide concern. However, as evidenced by recent findings from Japan, the phenomenon is markedly geographical: rural areas experience aging and depopulation first. Outmigration from these shrinking regions leads to reduced birth rates, further exacerbating the aging demographic. Implementing policies aimed at reducing spatial inequalities also presents challenges in terms of overall efficiency, forcing lawmakers to weigh different objectives.
Governments are reevaluating investments in areas grappling with aging populations and the exodus of youth. Japan has revived its regional revitalization strategy, directly linking it to plummeting birth rates and increasing aging (Cabinet Secretariat of Japan 2024). Spain has allocated over €10 billion across 130 initiatives to tackle its own ‘demographic challenge’ (Government of Spain 2021). Similarly, Italy’s National Strategy for Inner Areas (OpenCoesione 2026) and the European Commission’s vision for rural areas (European Commission 2021) emphasize key services, connectivity, and local development in their policies.
The pivotal inquiry is not just whether these shrinking areas merit assistance, but rather what achievable outcomes such support can produce and at what expense. Economists caution that contracting municipalities may suffer from diminishing amenities since public services typically exhibit scale economies (Heinemann et al. 2007), and that population aging can hamper economic growth (Kotschy and Bloom 2023). The crucial element often overlooked is geography: understanding who migrates, who remains, and how these choices reshape the fiscal and economic landscape of local communities.
In Giannone et al. (2026), we investigate this issue with Japan serving as our experimental backdrop. Japan is particularly interesting because it stands out as one of the oldest and rapidly shrinking countries globally, and its demographic trajectory serves as an early warning for challenges now emerging in certain parts of Europe and East Asia. By 2015, 26% of Japan’s population was aged 65 and older, a figure projected to rise to 37% by 2050. The country’s demographic challenges can serve as a cautionary tale regarding the social and fiscal strains connected to aging populations (Stawasz et al. 2018). However, these national statistics obscure a compelling geographical pattern; numerous rural municipalities have elderly populations nearing 50%, while metropolitan areas tend to be younger and more populous.
The first key observation is straightforward yet significant: aging and depopulation are not uniformly dispersed. Between 1980 and 2010, older Japanese municipalities experienced population loss and accelerated aging, while younger municipalities generally saw growth and maintained their youthfulness. Figure 1 illustrates this historical divergence.
Figure 1 Historical demographic divergence across Japanese municipalities between 1980 and 2010
Notes: Older municipalities in 1980 lost population and aged further, while younger municipalities tended to grow and remain younger.
Source: Giannone et al. (2026), Figure 4.
This observation raises a crucial timing issue: Japan’s overall population decline didn’t begin until around 2010, but the regional disparity in aging and depopulation had already begun long before. This divergence isn’t solely about different fertility rates in various locales; it’s also intertwined with migration patterns. Young adults continuously gravitate toward larger cities, particularly Tokyo, where their offspring are subsequently born, rather than in the rural areas they departed from. This creates a cumulative demographic effect: outmigration diminishes future birth rates, consequently aging the originating region even further.
This demographic mechanism has significant implications because local economies hinge on local scales. Local businesses, healthcare facilities, schools, childcare services, public transport, and municipal offices all require a sufficient number of users and taxpayers to thrive. Utilizing municipality-level data and an instrumental-variable strategy informed by historical migration patterns, our findings indicate that areas witnessing a decline in working-age populations experience reductions in various local amenities, such as retail and medical services. Concurrently, the per-capita costs of public spending increase. A road network, school, or municipal office does not become less expensive proportionately as populations decline. This fiscal reality illustrates the dilemma facing shrinking towns: fewer residents mean fewer workers, fewer children, and higher costs per individual.
To analyze potential future scenarios, we developed a dynamic spatial model where individuals of varying ages decide where to live, influenced by wages, housing costs, amenities, migration expenses, pensions, and taxes. In areas with a dense population, wages and amenities can rise, but housing prices spike when demand is high. Conversely, in sparsely populated areas, the per-capita costs of public services rise. We calibrated this model using Japanese data to project future regional outcomes.
The baseline projections are concerning. Tokyo’s population share is forecasted to climb from around 10% in 2015 to roughly 26% over the next two centuries. In contrast, the collective population share of the five oldest prefectures – Kochi, Shimane, Tokushima, Tottori, and Yamagata – is expected to plummet from around 3% to under 1%. By that time, their elderly demographic could approach 60%, while Tokyo’s elderly share remains near one-third. Notably, when we simulate scenarios limiting internal migration or stabilize the spatial distribution of births at their 2015 level, much of this regional divergence diminishes. In essence, the future landscape of aging is not solely dictated by national fertility and mortality rates; it heavily relies on the spatial decisions made by younger populations regarding where they choose to live and raise families.
Figure 2 Projected population shares and elderly shares for Tokyo and the five oldest prefectures
Source: Giannone et al. (2026), Figure 9.
This finding bridges aging with the broader urban economics literature on agglomeration and regional divergence (Moretti 2012, Diamond 2016). Large cities offer higher productivity levels and abundant amenities but also experience elevated housing costs. Our simulations reveal that the productivity and amenity advantages of Tokyo outweigh the congestion issues stemming from housing demands. As more people flock to the city, it becomes increasingly attractive, while less populated regions suffer from declining scales. This exacerbates regional inequality in utility flow, especially for those in the working age bracket. Although the elderly have some protection through nationally funded pensions, they still rely on local services and amenities.
However, there is a complex twist. The same reallocation that exacerbates spatial inequality can enhance overall efficiency. Concentrating populations in high-productivity, lower-cost areas increases average labor income and alleviates the national burden of providing local public services. By discouraging migration or essentially freezing the geographic location of births, more individuals remain in smaller, less productive areas where public service provision is costlier per capita. Thus, the policy dilemma is not a straightforward matter of choosing between beneficial support for declining regions or harmful neglect; it embodies a trade-off between equity and efficiency.
Place-based policies occupy this critical intersection. Recent research into place-based industrial policy indicates that subsidies may yield substantial spillover effects with only moderate impacts on regional inequality (Atalay et al. 2023). A recent analysis also suggests that retiree mobility in France can generate economic benefits for poorer rural regions (Badilla-Maroto et al. 2026), reminding us that not all migration trends reinforce metropolitan centralization. Yet, in aging Japan, the dominant force remains the migration of young workers and future parents away from older regions.
We modeled one clear policy intervention: transferring funds to residents in the five oldest prefectures, financed by taxes levied on Tokyo inhabitants. This is not aimed at replicating a specific program but serves as a benchmark to understand the economic dynamics influencing regional revitalization strategies. The duration of such policies is critical since the effects of migration, birth rates, and local-scale dynamics unfold gradually. A temporary financial boost may provide short-term relief from decline, but a sustained policy alters perceptions of the desirability of living, working, and raising families in specific locales.
A 5% income transfer maintained for a century produces significant outcomes. By 2065, this approach nearly doubles the population in the five oldest prefectures compared to the baseline and reduces their elderly share from approximately 45% to about one-third. The rise in local real income surpasses the transfer itself, given that more residents contribute to productivity and amenities through enhanced local scale.
Nevertheless, this policy comes at a cost. The same 5% transfer leads to a more than 1% decline in aggregate labor income per capita and a 0.5% increase in overall fiscal spending per capita. These consequences arise because the transfer encourages more people to remain in areas with lower productivity and more expensive public service delivery. While the policy decreases spatial inequality, it simultaneously jeopardizes aggregate efficiency.
Figure 3 Effects of transfers to the five oldest prefectures on population shares and elderly shares in 2065
Source: Giannone et al. (2026), Figure 13.
The primary takeaway is that discussions about aging and depopulation on a national level must integrate spatial considerations. A country’s overall population may diminish while its largest city experiences population growth. An aging society can become increasingly regionally unequal as individuals rationally migrate toward areas of opportunity. Although subsidies can alleviate the decline of rural areas, they also reshape the demographic landscape, influencing where people choose to live and establish families. This accumulation of costs and benefits unfolds over decades.
For policymakers, the pertinent question is not whether each rural village can or should revert to its former population levels. Instead, it revolves around selecting from varying objectives: ensuring access to essential services, preserving local communities, supporting mobility, encouraging childbirth and settlement in declining regions, and maintaining overall productivity. Our findings indicate that it is not feasible to maximize all these goals simultaneously. Existing as a ghost town is more than just a demographic concern; it is a spatial economic issue that demands targeted policies to adequately address the geography of aging.
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