Capital‐ and Labor‐saving Technical Change in an Aging Economy

Abstract

Does population aging and the associated increase in the old-age dependency ratio affect economic growth? The answer is given in a novel analytical framework that allows for population aging to affect endogenous capital-and labor-saving technical change. In a steady state capital-saving technical progress vanishes, and the economy's growth rate of per-capita variables reflects only labor-saving technical change. The mere possibility of capital-saving technical change is shown to imply that the economy's steady-state growth rate becomes independent of its age structure: Neither a higher life expectancy nor a decline in fertility affects economic growth in the long run.

A Generalized Steady-State Growth Theorem

“…Section 2.1 gives 2 Klump, McAdam, and Willman (2007) study the US economy and confirm this pattern of technical change empirically for the period 1953 to 1998. 3 The reduced form of the three-sector model of endogenous capital-and labor-augmenting technical change devised in Irmen (2011) shares the relevant properties with the one-sector model of Irmen (2013). Hence, all findings derived in Section 3.1 also apply to this three-sector model.…”

“…In Irmen (2013), current output serves as an input in productivity enhancing innovation investments. These innovation investments reduce the amount of resources available for consumption and capital accumulation, i. e., the aggregate investment function is strictly positive.…”

“…Therefore, in steady state capital-augmenting technical change vanishes and labor-augmenting technical change determines the growth rate of the economy. 2 This point is made for the one-sector model of Irmen (2013) as well as for the multi-sector model of Acemoglu (2003) and its extension (Acemoglu (2009), Chapter 15). 3 To the best of my knowledge, these studies are the only growth models in the literature allowing for endogenous capital-and labor-augmenting technical change and capital accumulation.…”

“…4 For the question at hand, it matters that these models differ in the way technical change is generated. In Irmen (2013) this requires the input of current final-good production. Therefore, the generalized steady-state growth theorem can be applied.…”

Endogenous capital- and labor-augmenting technical change in the neoclassical growth model

“…To render this possible, we devise a novel micro-foundation for a competitive production sector that builds on and complements concepts developed in the competitive endogenous growth models of Hellwig and Irmen (2001) and Irmen (2013a). It rests on the idea that the fabrication of output requires tasks to be performed.…”