Working Paper: NBER ID: w12453
Authors: Dirk Krueger; Alexander Ludwig
Abstract: This paper employs a multi-country large scale Overlapping Generations model with uninsurable labor productivity and mortality risk to quantify the impact of the demographic transition towards an older population in industrialized countries on world-wide rates of return, international capital flows and the distribution of wealth and welfare in the OECD. We find that for the U.S. as an open economy, rates of return are predicted to decline by 86 basis points between 2005 and 2080 and wages increase by about 4.1%. If the U.S. were a closed economy, rates of return would decline and wages increase by less. This is due to the fact that other regions in the OECD will age even more rapidly; therefore the U.S. is "importing" the more severe demographic transition from the rest of the OECD in the form of larger factor price changes. In terms of welfare, our model suggests that young agents with little assets and currently low labor productivity gain, up to 1% in consumption, from higher wages associated with population aging. Older, asset-rich households tend to lose, because of the predicted decline in real returns to capital.
Keywords: demographic change; rates of return; wealth distribution; welfare
JEL Codes: C68; D33; E17; E25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| demographic changes (J11) | rates of return (G12) |
| demographic changes (J11) | wages (J31) |
| aging (J14) | rates of return (G12) |
| aging (J14) | wages (J31) |
| younger agents (L85) | consumption (E21) |
| older asset-rich households (D14) | real returns to capital (G19) |
| newborns in 2005 (J13) | lifetime consumption (D15) |
| social security reform (H55) | lifetime consumption (D15) |