Working Paper: CEPR ID: DP6581
Authors: MartÃn Gonzalezeiras; Dirk Niepelt
Abstract: We analyze the effect of changes in fertility and longevity on taxes, the composition of government spending, and productivity. To that purpose, we introduce politics in an OLG economy with endogenous growth due to human and physical capital accumulation. Population ageing shifts political power from students and workers to retirees, leading to a reallocation of resources from education spending to retirement benefits and a slowdown of productivity growth. Calibrated to U.S. data, the closed-form solutions of the model predict retirement benefits as a share of GDP to strongly increase over the next decades and the education share to fall. This effect depresses the annual productivity growth rate by 10 basis points. In spite of higher labor-income taxes, per-capita labour supply is predicted to rise, as a consequence of increased life expectancy. The equilibrium allocation is consumption and production efficient, but the political process allocates a much smaller share of resources to eduction than a Ramsey planner with balanced welfare weights.
Keywords: government budget; growth; labour supply; public education; transfers
JEL Codes: E6; H5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Population ageing (J11) | reallocation of resources from education to retirement benefits (J26) |
| reallocation of resources from education to retirement benefits (J26) | productivity growth (O49) |
| Increased life expectancy (J17) | per capita labor supply (J20) |
| Increased life expectancy (J17) | government spending priorities (H56) |
| Population ageing (J11) | productivity growth (O49) |