Impact of population aging on per capita income
In this paper, Kotschy and Bloom investigate the consequences of contracting working-age population for growth of income per capita. They use a standard empirical growth model that incorporates a population age structure. The novelty of their approach is related to the way they conceptualize the age structure: conventional measures of age structure define working ages retrospectively based on chronological age. But this classification, the authors argue, ignores changes in age patterns of health resulting from reductions in mortality and disability and thus misses heterogeneity in people’s age-specific functional capacities across countries and over time. Instead, Kotschy and Bloom use a new prospective concept defined as a variable age threshold that depends on expected years of life ahead and that correlates with functional capacity in terms of mortality, disability, body strength, and cognitive capacity at the macro level. Their empirical model uses data from 145 countries (both OECD and non-OECD) from 1950 to 2015 to describe the effects of population age structure on economic growth. Then they combine the estimated parameters with demographic predictions to estimate the implications of population aging for projected growth of income per capita in 2020–2050. Their findings include:
- Contractions in working-age shares will slow growth; however, gains in functional capacity thanks to higher life expectancy can cushion perhaps half of this slowdown.
- With population aging, growth is projected to slow by 0.8 percentage points if we measure working ages retrospectively but only by 0.4 percentage points if we measure working ages prospectively. Gains in age-specific functional capacities thanks to changing age patterns of health can help counteract negative consequences of population aging for growth by enabling people to expand economic activity into older ages.
- In contrast, population aging is projected to spur average growth of income per capita in non-OECD countries.
Population Aging and Economic Growth: From Demographic Dividend to Demographic Drag?
Authors: Rainer Kotschy, David E. Bloom
From: Harvard University
Impact of population aging on the natural rate of interest in the EU
Bodnár and Nerlich in this paper focus, among other issues, on the impact of population aging, on the natural rate of interest. The main channels through which an aging population could contribute to the decline in the natural rate of interest in the euro area are: a) higher precautionary savings to prepare for longer periods of retirement, b) capital deepening due to lower labor supply, c) less innovation activity reflecting a shrinking share of young and prime-age workers, and d) higher demand for safe assets due to older people being more risk averse. Counterbalancing forces may, however, also need to be considered:
Aggregate savings and capital supply may decline with the demographic transition going forward, given that the share of older citizens, who tend to divest, is rising, while the share of the working age population, who accumulate savings, is shrinking. Assuming that the relative importance of these different channels may change for the euro area going forward, the demographic transition is expected to reinforce the existing downward trend of the natural rate of interest at least until 2030, mainly on account of a shrinking labour force. Yet, uncertainties surrounding this outlook are very high.
The macroeconomic and fiscal impact of population ageing
Authors: Katalin Bodnár, Carolin Nerlich
From: ECB
