Demographic Obstacles to European Growth

45 Pages Posted: 25 Apr 2019 Last revised: 31 Mar 2020

See all articles by Thomas F. Cooley

Thomas F. Cooley

New York University - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)

Espen Henriksen

Department of Financial Economics, BI Norwegian Business School

Charlie Nusbaum

University of California, Santa Barbara (UCSB) - Department of Economics

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Date Written: November 19, 2019

Abstract

Since the early 1990's the growth rates of the four largest European economies -- France, Germany, Italy, and the United Kingdom -- have slowed. This persistent slowdown suggests a low-frequency structural change is at work. A combination of longer individual life expectancies and declining fertility have led to gradually aging populations. Growth accounting identifies the following five sources of economic growth: total factor productivity, capital deepening, labor supply on the intensive and extensive margins, and population growth. Changing demographics directly affects all these five margins. Our results indicate that changing demographics particularly affects the two labor supply margins, in part due to that the substantial gains to longevity have predominately translated into longer expected time in retirement and only to a smaller degree into longer working lives. Aging populations also affect economic growth indirectly through the pension systems that are in place and the need to fund them. Tax increases to balance budgets will impose distortions to individual factor-supply choices. We highlight that the crucial economic questions related to demographic change are why individuals choose to reduce their hours and to retire when they do. We quantify the growth effects from aging and from the financing of public pensions.

Keywords: economic growth, life-cycle labor supply and savings, ageing, mortality, fertility

JEL Classification: F21, J21

Suggested Citation

Cooley, Thomas F. and Henriksen, Espen and Nusbaum, Charlie, Demographic Obstacles to European Growth (November 19, 2019). NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3356824 or http://dx.doi.org/10.2139/ssrn.3356824

Thomas F. Cooley

New York University - Leonard N. Stern School of Business ( email )

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Espen Henriksen (Contact Author)

Department of Financial Economics, BI Norwegian Business School ( email )

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Oslo, 0442
Norway

Charlie Nusbaum

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

Santa Barbara, CA

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