Working Paper: NBER ID: w11668
Authors: Hans Fehr; Sabine Jokisch; Laurence J. Kotlikoff
Abstract: This paper develops a dynamic, life-cycle, general equilibrium model to study the interdependent demographic, fiscal, and economic transition paths of China, Japan, the U.S., and the EU. Each of these countries/regions is entering a period of rapid and significant aging requiring major fiscal adjustments. \n \nIn previous studies that excluded China we predicted that tax hikes needed to pay benefits along the developed world's demographic transition would lead to capital shortage, reducing real wages per unit of human capital. Adding China to the model dramatically alters this prediction. Even though China is aging rapidly, its saving behavior, growth rate, and fiscal policies are very different from those of developed countries. If this continues to be the case, the model's long run looks much brighter. \n \nChina eventually becomes the world's saver and, thereby, the developed world's savoir with respect to its long-run supply of capital and long-run general equilibrium prospects. And, rather than seeing the real wage per unit of human capital fall, the West and Japan see it rise by one fifth by 2030 and by three fifths by 2100. These wage increases are over and above those associated with technical progress.
Keywords: Demographic Transition; Fiscal Policy; Economic Growth; China; Aging Population
JEL Codes: E2; E4; H2; H3; H5; H6; J1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Aging populations (J11) | Fiscal adjustments (E62) |
| Fiscal adjustments (E62) | Capital shortages (F65) |
| Tax hikes (H29) | Real wages per unit of human capital (J24) |
| Chinese savings behavior (D14) | Global capital markets (G15) |
| High Chinese savings behavior + Fiscal policies restrained (E21) | Capital surplus (F21) |
| Capital surplus (F21) | Real wages in developed countries (J39) |
| Government investment (H54) | Predicted decline in real wages (J39) |
| Short-run outflow of capital to China (F21) | Wages in developed countries (J39) |
| Workers adjusting labor supply (J29) | Higher future wages due to China's capital accumulation (J39) |