Demographic change, human capital and welfare

Abstract

This paper employs a large scale overlapping generations (OLG) model with endogenous human capital formation using a Ben-Porath (1967) technology to evaluate the quantitative role of human capital adjustments for the economic consequences of demographic change. We find that endogenous human capital formation is a quantitatively important adjustment mechanism which substantially mitigates the macroeconomic impact of population aging. On the aggregate level, the predicted decrease of the rate of return to physical capital is only one third of the predicted decrease in a standard model with a fixed human capital profile. In terms of welfare, while young agents with little assets gain up to 0.8% in consumption from increasing wages in both models, welfare losses from decreasing returns of older and asset rich households are substantial. But importantly, these losses are about 50 − 70% higher in the model without endogenous human capital formation. Ignoring this adjustment channel thus leads to quantitatively important biases of the welfare assessment of demographic change. We also document that not reforming the social security system but letting contribution rates increase will largely offset any positive welfare effects for future generations. JEL classification: C68, E17, E25, J11, J24

Pension reform in an OLG model with heterogeneous abilities

“…The inferior employment effects from a shift to a fully-funded system may, however, be surprising from the perspective of recent work by e.g. Börsch-Supan and Ludwig (2010), Ludwig et al (2012) and Fisher and Keuschnigg (2010). For a discussion of this issue we refer to Buyse et al (2011).…”

“…The literature shows a variety of functions, typically including one or two of the following inputs: individual time allocated to education, private expenditures on education by individuals themselves or by their parents, and government expenditures on education (e.g. Lucas, 1988, Glomm andRavikumar, 1992;Michel, 1999, Kaganovich andZilcha, 1999;Bouzahzah et al, 2002;Ludwig et al, 2012). In case of two inputs, the adopted functional form is very often Cobb-Douglas (e.g.…”

“…Still others have demonstrated the crucial role of human capital formation to counteract the negative effects of population ageing on per capita output (e.g. Docquier and Michel, 1999;Ludwig et al, 2012). Consensus on what pension reform would serve the goals of higher employment, productivity growth, and welfare best, has however not been reached.…”

“…First of all, about all existing studies either investigate incentives to work in a model with exogenous human capital and growth, or investigate human capital and growth while ignoring the labor-leisure choice and the endogeneity of labor supply. Buyse et al (2011) and Ludwig et al (2012) are exceptions 1 . These two studies also clearly demonstrate the importance of modelling the many mutual relationships between key variables.…”

Stimulating annuity markets

“…To this end, we use the imperfect-annuity-market models of Hansen andİmrohoroglu (2008) and Heijdra and Mierau (2012) but extend them to allow for endogenous human-capital accumulation along the lines of Ludwig et al (2012) and Heijdra and Reijnders (2012). Incorporating the human capital channel into the analysis is important for several reasons.…”