MSc International Management, Module 1: Demographic Change Report

This report examines the macroeconomic implications of demographic change, focusing on declining fertility rates, increasing longevity, and the aging of populations. It analyzes the impact on labor supply, considering the effects on potential GDP and the dependency ratio. The report delves into the effects on capital, including investment, saving behavior, and the Solow model's implications. Furthermore, it explores the impact on productivity, examining the role of innovation, technology, and the productivity of older workers. The report also discusses the implications for firms, including maintaining productivity, ensuring labor availability, and adapting to new market segments. It references various sources, including IMF reports and articles from the Financial Times, to support its analysis and provides insights into mitigating factors such as immigration, labor force participation, and technological advancements.

MSc in International Management
«Global Scenarios: Module 1 (Macroeconomics)»
Lecture 7
Demographic Change and Growth

G-20*: Population Distribution by Age
Groups (% of total population)
Source: IMF, “Macroeconomics of Aging and Policy Implications”, prepared by staff for the G20 2019
* https://ec.europa.eu/info/food-farming-fisheries/farming/international-cooperation/international-organisations/g20_en

Demographic Change: Main Drivers
progression of large-sized
cohorts to older ages
Declining fertility rates
Increasing longevity

Not only developed economies…
Robin Harding, “The costs of declining population”, Financial Times, Jan 14, 2020

MACROECONOMIC IMPLICATIONS:
LABOR INPUT

Macroeconomic Implications: Labor
• Recall our production function:
𝑌 = 𝐴𝐾
1
3𝐿
2
3
• Less workers available → lower output
• Implication: lower level of potential GDP

Macroeconomic implications: Labor
𝒀
𝑷𝒐𝒑
= 𝒀
𝑳× 𝑳
𝑷𝒐𝒑 (𝟏𝟓 − 𝟔𝟒)
× 𝑷𝒐𝒑 𝟏𝟓 − 𝟔𝟒
𝑷𝒐𝒑
– 𝐿
𝑃𝑜𝑝 15−64 = participation rate
– 𝑃𝑜𝑝(15−64)
𝑃𝑜𝑝 = 1 – dependency ratio
• “Accounting” effect - per capita GDP declines if:
– The dependency ratio increases
→ The share of working age population declines

Macroeconomic Implications - Labor
Average annual Contributions of the Change of the Share of the Working
Age Population to GDP per Capita Growth (IMF)
Source: IMF, “Macroeconomics of Aging and Policy Implications”, prepared by staff for the G20 2019

Impact of aging: a counterfactual analysis
Bloom D., D. Canning and G. Fink, “Implications of population ageing for economic growth”, Oxford Review of
Economic Policy, Vol. 26, n. 4, 2010, pp. 583-612
a thought experiment (Bloom et al., 2010)
• Consider the actual path of income per capita
between 1960 and 2005
• Assume a dynamics in population and labor
force/population ratio equal to the one expected
to undergo between 2005 and 2050
• rather than the actual change they underwent during
the period 1960-2005

Impact of aging on growth: counterfactual
analysis
Current OECD members only:
actual and counterfactual annual
growth rates of income per capita,
1960–2005
(counterfactual: 2005–50 growth
rate of labor force per capita)
Bloom D., D. Canning and G. Fink, “Implications of population ageing for economic growth”, Oxford Review of
Economic Policy, Vol. 26, n. 4, 2010, pp. 583-612
Growth: 2.1% instead of
2.8% (26 OECD average)

Macroeconomic Implications: Labor
However
the magnitude of the effects depends, among
other things, on how firms, governments and
households react…

Mitigating Factors
• Immigration
• Changes in labor force participation
– Women and older workers
– Work longer
• Improvements in health and education
– Increasing productivity
• Change in saving behavior (more on that later
on)
• Innovation and technology