Working Paper: NBER ID: w12140
Authors: Heinrich Hock; David N. Weil
Abstract: We examine the dynamic interaction of the population age structure, economic dependency, and fertility, paying particular attention to the role of intergenerational transfers. In the short run, a reduction in fertility produces a "demographic dividend" that allows for higher consumption. In the long run, however, higher old-age dependency can more than offset this effect. To analyze these dynamics we develop a highly tractable continuous-time overlapping generations model in which population is divided into three groups (young, working age, and old) and transitions between groups take place in a probabilistic fashion. We show that most highly developed countries have fertility below the rate that maximizes steady state consumption. Further, the dependency-minimizing response to increased longevity is to raise fertility. In the face of the high taxes required to support transfers to a growing aged population, we demonstrate that the actual response of fertility will likely be exactly the opposite, leading to increased population aging.
Keywords: No keywords provided
JEL Codes: E10; E21; H55; J11; J13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reduction in fertility (J13) | Demographic dividend (J19) |
| Demographic dividend (J19) | Higher consumption (E21) |
| Increased old-age dependency (J14) | Decreased consumption (E21) |
| Increased longevity (D15) | Raise fertility (J13) |
| Raise fertility (J13) | Increased population aging (J11) |
| Changes in fertility (J13) | Age structure (J11) |
| Age structure (J11) | Economic dependency (F54) |
| Economic dependency (F54) | Fertility rates (J13) |