Demographic Obstacles to European Growth
45 Pages Posted: 25 Apr 2019 Last revised: 27 Nov 2019
Date Written: November 19, 2019
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: Suggested Citation