Demographic Obstacles to European Growth

39 Pages Posted: 25 Apr 2019 Last revised: 28 Jun 2019

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

Date Written: March 25, 2019

Abstract

Since the early 1990’s there have been persistent slowdowns in the growth rates of the four largest European economies: France, Germany, Italy, and the United Kingdom. This persistence suggests a low-frequency structural change is at work. Ageing populations, both in terms of longer individual life expectancies and declining fertility have caused a shift in the age-cohort distribution. Despite gains to longevity, labor-supply choices over the life cycle have changed little. Growth accounting identifies the following five sources of economic growth: total factor productivity, capital accumulation, labor supply on the intensive and extensive margin, and population growth. Changing demographics affect all these five margins. The effects of ageing populations on economic growth are also exacerbated by the pension systems in place. In order to fund increasing liabilities with a shrinking tax base, tax rates must increase to balance budgets. This will impose distortions to individual factor-supply choices, providing further headwinds for economic growth. We quantify the additional growth effects resulting from these distortions.

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 (March 25, 2019). 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 )

44 West Fourth Street, 7-180
Room 7-85
New York, NY 10012
United States
212-998-0870 (Phone)
212-995-4218 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Computer Research Center
Cambridge, MA 02138
United States

Espen Henriksen (Contact Author)

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

Nydalsveien 37
Oslo, 0442
Norway

Charlie Nusbaum

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

2127 North Hall
Santa Barbara, CA 93106
United States

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