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The Effect of Population Aging on Economic Growth

Author

Listed:
  • Nicole Maestas

    (RAND Economics)

  • Kathleen Mullen

    (RAND Economics)

  • David Powell

    (RAND Economics)

Abstract
Population aging is widely expected to have detrimental effects on aggregate economic growth. However, we have little empirical evidence about the actual existence or magnitude of such effects. In this paper, we exploit differential aging patterns at the state level in the United States between 1980 and 2010. Many states have already experienced high growth rates of the 60+ population, comparable to the predicted national growth rate over the next several decades. Furthermore, these differential growth rates occur partially for reasons unrelated to economic growth, providing a natural approach to isolate the impact of aging on growth. We predict the magnitude of population aging at the state-level given the state’s age structure in an initial period and exploit this predictable differential growth to estimate the impact of population aging on Gross Domestic Product (GDP) growth, and its constituent parts, labor force and productivity growth. We estimate that a 10% increase in the fraction of the population ages 60+ decreases GDP per capita by 5.7%. We find that this reduction in economic growth caused by population aging is primarily due to a decrease in growth in the supply of labor. To a lesser extent, it is also due to a reduction in productivity growth. We present evidence of ownward adjustment of earnings growth to reflect the reduction in productivity.

Suggested Citation

  • Nicole Maestas & Kathleen Mullen & David Powell, 2014. "The Effect of Population Aging on Economic Growth," Discussion Papers 14-012, Stanford Institute for Economic Policy Research.
    • Handle: RePEc:sip:dpaper:14-012
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    File URL: http://www-siepr.stanford.edu/repec/sip/14-012.pdf
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    References listed on IDEAS

    as
    1. Kogel, Tomas, 2005. "Youth dependency and total factor productivity," Journal of Development Economics, Elsevier, vol. 76(1), pages 147-173, February.
    2. J. M. C. Santos Silva & Silvana Tenreyro, 2006. "The Log of Gravity," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 641-658, November.
    3. James Feyrer, 2007. "Demographics and Productivity," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 100-109, February.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Yihan Liu & Niklas Westelius, 2017. "The Impact of Demographics on Productivity and Inflation in Japan," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 8(02), pages 1-16, June.
    2. Daron Acemoglu & Pascual Restrepo, 2017. "Secular Stagnation? The Effect of Aging on Economic Growth in the Age of Automation," American Economic Review, American Economic Association, vol. 107(5), pages 174-179, May.
    3. V. Vandenberghe, 2017. "The productivity challenge. What to expect from better-quality labour and capital inputs?," Applied Economics, Taylor & Francis Journals, vol. 49(40), pages 4013-4025, August.
    4. Rainer Kotschy & Uwe Sunde & Tommaso MonacelliManaging Editor, 2018. "Can education compensate the effect of population ageing on macroeconomic performance?," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 33(96), pages 587-634.
    5. Claudio Loser & Jose Fajgenbaum & Harpaul Alberto Kohli & Ieva Vilkelyte, 2017. "How Aging Societies May Affect Global Growth Prospects," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 9(1-3), pages 38-74, January.
    6. John G. Fernald, 2016. "Reassessing Longer-Run U.S. Growth: How Low?," Working Paper Series 2016-18, Federal Reserve Bank of San Francisco.
    7. Casper Worm Hansen & Holger Strulik, 2017. "Life expectancy and education: evidence from the cardiovascular revolution," Journal of Economic Growth, Springer, vol. 22(4), pages 421-450, December.
    8. Frank T. Denton & Byron G. Spencer, 2018. "The Differential Effects of Population Aging on Provincial GDP per capita and the Role of Productivity Growth as a Possible offset," Department of Economics Working Papers 2018-04, McMaster University.

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    More about this item

    Keywords

    population aging; GDP growth; demographic transitions;
    All these keywords.

    JEL classification:

    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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