Scandinavian Working Papers in Economics

Institute for Futures Studies

No 2007:10: Age structure and productivity growth

Jaypee Sevilla
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Jaypee Sevilla: Harvard School of Public Health

Abstract: Among the most central questions at the intersection of demography and economics is the impact of large scale demographic processes on long-run economic performance. The classical version of this inquiry, occupying thinkers from Malthus towards those from the mid-to-late 20th century, had to do with whether rapid population growth threatened economic growth. This classical inquiry has been superseded by more sophisticated questioning in which the focus on growth rate of the aggregate population has been replaced by focus on the growth rates of age-specific population sub-groups. Disaggregating the effects of population growth by age-group is generally accepted to be a fundamental improvement over classical inquiry because people’s economic roles and contributions vary by age: the young are net consumers and beneficiaries of human capital investments, adults are net producers and savers, and the old are (at least in theory or to a greater degree than adults) net consumers. Thus the economic consequences of rapid growth in the population size of the young and the elderly could potentially have a depressing impact on growth, while rapid growth in the population size of adults could stimulate growth. The demographic transition brings with it a three stage process in which a baby boom cohort moves through the population’s age pyramid. The life cycle of this cohort creates a first stage in which there is rapid growth in youth population, then a second stage in which there is rapid growth in the adult population, and finally a third stage in which there is rapid growth in the elderly population. The first and third stages can be thought of as the challenging stages since economies must confront the challenge of providing for large dependent populations. However, the second stage can be thought of as a demographic gift or dividend stage since growth in the productive adult population can potentially boost economic growth. The traditional mechanisms for the demographic dividend include the impact of the boom cohort on labor supply, savings, and human capital. However, it seems to us that there has been no research on the potential impact of age structure on technological progress, which is unusual since all standard accounts of economic growth hold that in the long run, it is technological progress that is the sole source of improvement in living standards. Demographic impacts on technology could well dwarf the importance of everything else. There are two competing hypotheses regarding demographic processes and technological progress. One holds that a rapidly growing adult population stimulates technological progress, while the other holds that it retards it. Analyzing cross-country macro data from developing countries for the period 1970 to 2000, we find that entry of the baby boom cohort into the adult stage is correlated with higher labor productivity, even after controlling for capital accumulation and past productivity. Our evidence supports the view that the demographic dividend includes positive impacts on technological progress, which may in the long-run prove more consequential than any other demographic dividend consequences.

Keywords: age structure; productivity growth; demographic transition

JEL-codes: J10

21 pages, August 2007

Price: 25 SEK

Note: ISSN 1652-120X; ISBN 978-91-85619-12-2

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