Hostname: page-component-8448b6f56d-jr42d Total loading time: 0 Render date: 2024-04-23T23:26:17.849Z Has data issue: false hasContentIssue false
  • English
  • Français

Macroeconomic and distributional effects of demographic change in an open economy—the case of Belgium

Published online by Cambridge University Press:  07 February 2020

Willem Devriendt Open the ORCID record for Willem Devriendt [Opens in a new window]  and
Freddy Heylen
Willem Devriendt
Affiliation:
Department of Economics, Ghent University, Sint-Pietersplein 6, 9000Ghent, Belgium
Freddy Heylen*
Affiliation:
Department of Economics, Ghent University, Sint-Pietersplein 6, 9000Ghent, Belgium
*
*Corresponding author. E-mail: freddy.heylen@ugent.be
Get access

Abstract

We construct and parameterize an overlapping generations model for an open economy with individuals who differ in innate ability. Key endogenous variables are hours worked, investment in human and physical capital, and per capita growth. The model replicates important data in Belgium since 1960 remarkably well. Simulating it, we observe that behavioral adjustments by households and firms contribute to reverse the negative arithmetical effect of future demographic change on per capita growth. Individuals work and study more. However, with unchanged policies, there remains a net negative effect on annual per capita growth of almost 0.3%-points on average in the next 25 years. This is mainly due to adverse consequences of reduced fertility and a declining working-age population on (the return to) physical capital investment. Model projections also point to rising income inequality induced by demographic change. Differences in the capacity of individuals to respond to increasing life expectancy by investing in education, and by saving, are key.

Keywords

Demographic changeeconomic growthinequalityoverlapping generationspopulation agingsecular stagnation

JEL classification

C68: Computable General Equilibrium Models E17: Forecasting and Simulation: Models and Applications O40: General J11: Demographic Trends, Macroeconomic Effects, and Forecasts D91: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making‡
Type
Research Papers
Information
Journal of Demographic Economics , Volume 86 , Issue 1 , March 2020 , pp. 87 - 124
Copyright
Copyright © Université catholique de Louvain 2020

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Acemoglu, D. and Restrepo, S. (2017) Secular stagnation? The effect of aging on economic growth. NBER Working Paper. N° 23077.Google Scholar
Aiyar, S., Ebeke, C. and Shao, X. (2016) The impact of workforce aging on European productivity. IMF Working Paper Series. N° 16/238.Google Scholar
Andolfatto, D. (1996) Business cycles and labor-market search. American Economic Review 86, 112–132.Google Scholar
Attanasio, O., Bonfatti, A., Kitao, S. and Weber, G. (2016) Global demographic trends: consumption, saving and international capital flows. In Piggott, J. and Woodland, A. (eds.), Handbook of the Economics of Population Aging, pp. 179–235. North-Holland: Elsevier.Google Scholar
Barro, R. and Lee, J. (2013) A new data set of educational attainment in the world, 1950–2010. Journal of Development Economics 104, 184–198.CrossRefGoogle Scholar
Ben-Porath, Y. (1967) The production of human capital and the life-cycle of earnings. Journal of Political Economy 75, 352–365.CrossRefGoogle Scholar
Bloom, E., Canning, D., Mansfield, R. and Moore, M. (2007) Demographic change, social security systems and savings. Journal of Monetary Economics 54, 92–114.CrossRefGoogle ScholarPubMed
Boone, B. and Heylen, F. (2019) Cross-country differences in unemployment: fiscal policy, unions and households preferences in general equilibrium. Scandinavian Journal of Economics 121, 1270–1302.CrossRefGoogle Scholar
Bouzahzah, M., de la Croix, D. and Docquier, F. (2002) Policy reforms and growth in computational OLG economies. Journal of Economic Dynamics and Control 19, 2093–2113.CrossRefGoogle Scholar
Buyse, T., Heylen, F. and Van de Kerckhove, R. (2017) Pension reform in an OLG model with heterogeneous abilities. Journal of Pension Economics and Finance 16, 144–172.CrossRefGoogle Scholar
Caselli, F. and Coleman, W. (2006) The world technology frontier. American Economic Review 96, 499–522.CrossRefGoogle Scholar
Cervellati, M. and Sunde, U. (2013) Life expectancy, schooling, and lifetime labor supply: theory and evidence revisited. Econometrica 81, 2055–2086.Google Scholar
Cervellati, M., Sunde, U. and Zimmermann, K. (2017) Demographic dynamics and long-run development: insights for the secular stagnation debate. Journal of Population Economics 30, 401–432.CrossRefGoogle Scholar
Cowell, F. (2011) Measuring Inequality. New York: Oxford University Press.CrossRefGoogle Scholar
Dedry, A., Onder, H. and Pestieau, P. (2017) Aging, social security design, and capital accumulation. Journal of the Economics of Ageing 9, 145–155.CrossRefGoogle Scholar
de la Croix, D., Pierrard, O. and Sneessens, H. (2013) Aging and pensions in general equilibrium: labor market imperfections matter. Journal of Economic Dynamics and Control 37, 104–124.CrossRefGoogle Scholar
European Commission (2013) Demography and inequality. Employment, Social Affairs and Inclusion. Policy brief, Brussels.Google Scholar
Fanti, L. and Gori, L. (2011) On economic growth and minimum wages. Journal of Economics 103, 59–82.CrossRefGoogle Scholar
Federal Planning Bureau (2016) Economische vooruitzichten 2016–21.Google Scholar
Feenstra, R. C., Inklaar, R. and Timmer, M. P. (2015) The next generation of the Penn World Table. American Economic Review 105, 3150–3182.CrossRefGoogle Scholar
Goodhart, C. and Erfurth, P. (2014) Demography and economics: Look past the past. VoxEU.org. 4 November.Google Scholar
Gordon, R. J. (2014) The turtle's progress: secular stagnation meets the headwinds. In Teulings, C. and Baldwin, R. (eds.), Secular Stagnation: Facts, Causes and Cures, pp. 47–59. London: CEPR Press and VoxEU.org.Google Scholar
Guo, J. and Lansing, K. (1998) Indeterminacy and stabilization policy. Journal of Economic Theory 82, 482–490.CrossRefGoogle Scholar
Heijdra, B. J. and Reijnders, L. S. (2018) Longevity shocks with age-dependent productivity growth. Journal of Pension Economics and Finance 17, 200–230.CrossRefGoogle Scholar
Heylen, F. and Van de Kerckhove, R. (2013) Employment by age, education, and economic growth: effects of fiscal policy composition in general equilibrium. The B.E. Journal of Macroeconomics 13, 49–103.CrossRefGoogle Scholar
Heylen, F. and Van de Kerckhove, R. (2019) Getting low educated and older people into work: fiscal policy in an OLG model with heterogeneous abilities. Journal of Policy Modeling 41, 586–606.CrossRefGoogle Scholar
IMF (2014) Perspectives on global real interest rates. World Economic Outlook. April, Chapter 3.Google Scholar
IMF (2018) Labor force participation in advanced economies: drivers and prospects. World Economic Outlook. April, Chapter 2.Google Scholar
Kotlikoff, L. J., Smetters, K. and Walliser, J. (2007) Mitigating America's demographic dilemma by pre-funding social security. Journal of Monetary Economics 54, 247–266.CrossRefGoogle Scholar
Koyuncu, M. (2011) Can progressive taxation account for cross-country variation in labor supply. Journal of Economic Dynamics and Control 35, 1474–1488.CrossRefGoogle Scholar
Krueger, D. and Ludwig, A. (2007) On the consequences of demographic change for rates of returns to capital, and the distribution of wealth and welfare. Journal of Monetary Economics 54, 49–87.CrossRefGoogle Scholar
Lee, R. (2016) Macroeconomics, aging and growth. In Piggott, J. and Woodland, A. (eds.), Handbook of the Economics of Population Aging, pp. 59–118. North-Holland: Elsevier.Google Scholar
Lucas, R. (1990) Supply-side economics: an analytical review. Oxford Economic Papers 42, 292–316.CrossRefGoogle Scholar
Ludwig, A., Schelkle, T. and Vogel, E. (2011) Online appendix to “demographic change, human capital and welfare”. Review of Economic Dynamics. Technical Appendices 08-168.Google Scholar
Ludwig, A., Schelkle, T. and Vogel, E. (2012) Demographic change, human capital and welfare. Review of Economic Dynamics 15, 94–107.CrossRefGoogle Scholar
Marchiori, L., Pierrard, O. and Sneessens, H. (2017) The EU-US unemployment puzzle revisited: institutions, demography, and capital flows. Journal of Demographic Economics 83, 259–305.CrossRefGoogle Scholar
Merz, M. (1995) Search in the labor market and the real business cycle. Journal of Monetary Economics 36, 269–300.CrossRefGoogle Scholar
Miles, D. (1999) Modelling the impact of demographic change upon the economy. Economic Journal 109, 1–36.CrossRefGoogle Scholar
OECD (2015) Statistical annex. Employment Outlook. Paris.Google Scholar
Onder, H. and Pestieau, P. (2014) Is aging bad for the economy? Maybe. Economic Premise, 144. The World Bank.Google Scholar
Rogerson, R. (2007) Taxation and market work: is Scandinavia an outlier? Economic Theory 32, 59–85.CrossRefGoogle Scholar
Rogerson, R. and Wallenius, J. (2009) Micro and macro elasticities in a life cycle model with taxes. Journal of Economic Theory 144, 2277–2292.CrossRefGoogle Scholar
Sánchez-Romero, M. (2013) The role of demography on per capita output growth and savings rates. Journal of Population Economics 26, 1347–1377.CrossRefGoogle Scholar
Shiller, R. (2015) Irrational Exuberance, 3rd Edn. ed. New Jersey: Princeton University Press.Google Scholar
Solt, F. (2016) The standardized world income inequality database. Social Science Quarterly 97, 1267–1281. http://myweb.uiowa.edu/fsolt/swiid/swiid.html.CrossRefGoogle Scholar
Sommacal, A. (2006) Pension systems and intragenerational redistribution when labor supply is endogenous. Oxford Economic Papers 58, 379–406.CrossRefGoogle Scholar
Studiecommissie voor de Vergrijzing (2016) Jaarlijks verslag 2016.Google Scholar
Supplementary material: PDF

Devriendt and Heylen supplementary material

Appendix

Download Devriendt and Heylen supplementary material(PDF)
PDF 943.3 KB