n. 504 September 2013

ISSN: 0870-8541

The Impact of an Ageing Population on EconomicGrowth: An Exploratory Review of the Main

Mechanisms

Renuga Nagarajan 1,2

Aurora A.C. Teixeira 1,2,3

Sandra Silva 1,2

1 FEP-UP, School of Economics and Management, University of Porto2 CEF.UP, Research Center in Economics and Finance, University of Porto

3 INESC TEC and OBEGEF

1

The impact of an ageing population on economic growth: an exploratory review of the

main mechanisms

Renuga Nagarajan

CEF.UP, Faculdade de Economia, Universidade do Porto

Aurora A.C. Teixeira

CEF.UP, Faculdade de Economia, Universidade do Porto; INESC

Porto, OBEGEF

Sandra Silva

CEF.UP, Faculdade de Economia, Universidade do Porto

Abstract

Although a myriad of important theoretical and empirical contributions on ageing populations

exist, these contributions are diffuse and lack an integrated vision of the distinct mechanisms

through which ageing populations impact on economic growth. As such, in this paper we

survey the literature that provides insights on the ageing population and its effect on economic

growth. In particular, we sought to uncover the main mechanisms through which ageing

impacts on economic growth.

The literature review shows that the impact of ageing on the performance of countries is

intimately related to the mechanism elected. About 70% of the empirical studies that focused

on the ‘public social expenditure’ mechanism convey a negative impact of ageing on

economic performance, whereas the majority (60%) of empirical studies that focus on ‘human

capital’ fail to uncover any significant statistical relation between ageing and the economic

growth proxy and the positive impact is more closely related to the ‘consumption and saving

patterns’ mechanism. Estimation methodologies also seem to be associated with distinct

impacts of ageing on economic growth, with less sophisticated econometric methods (i.e.

OLS and panel) being most often associated with negative (cor)relations. The bulk of the

empirical evidence concerns developed countries (and the ‘public social expenditure’

mechanism), with most of the analysis indicating a negative and significant relation between

ageing and growth. Given that developed, developing and even the least developed countries

are/will be affected by the phenomenon of an ageing population, knowing the degree to which

the influence of ageing varies among countries (including developing and the least

developed), and through which mechanisms, is essential to specifying sound public policies.

Keywords: Ageing; economic growth; consumption and saving patterns; public expenditure;

human capital

2

1. Introduction

Even though longevity and lower mortality rates are considered major successes for medical

science (Dalgaard, 2012), the demographic change they convey is commonly taken as having

a negative influence on national economies (Mason and Lee, 2011).

Many developed countries are approaching an era of ageing populations due to an increase in

longevity, a decrease in mortality rates and a decrease in fertility rates (Harper and Leeson,

2009). The decline in population growth has been visible since the mid-1970s when the adult

working-age population in several countries outpaced child population (Mason and Lee,

2011).

According to the World Health Organization (WHO, 2012), the proportion of people aged 65

and above in Europe is predicted to increase from 14% in 2010 to 25% in 2050. Hence, it is

expected that, in the near future, the prime working age group will be smaller than the older

age group.

The involvement of women in the labour force is also considered to be negatively related to

the fertility rate (Becker et al., 1990). In developed countries more women have entered the

labour market. For instance, the growth rate of female employment in the Euro area (17

countries) increased from 1.3% in 1996 to 2.3% in 2007 (Eurostat 2012) and here having a

child became a choice for female employees (Alders and Broer, 2004). Since human capital

and the fertility rate are negatively correlated (Alders and Broer, 2004), the increasing trend

of women to be better educated generally leads to a decrease in the fertility rate. Productivity

shocks and the retirement of the baby boom generation reinforces the increase in the ageing

population (Alders and Broer, 2004). Underlying the issue of fertility, Alders and Broer

(2004) further argue that the current demographic transfer faced by developed countries is no

longer an exogenous shock since it is due to the increase of women capital in the labour

market, which has led to a decrease in the fertility rate. Given this critical situation, Alders

and Broer (2004) further state that the altruistic behaviour of married couples will be a key

factor in building the future human capital. Nonetheless, it is argued that the current financial

crisis is not helping to promote the necessary altruistic behaviour of couples.

Declining fertility leads to populations with many working age individuals and fewer children

to succeed them (Weil, 2006; Lee et al., 2011). For a highly developed country the ‘ideal’

fertility rate is considered to be associated with a 2.1 replacement level (Nimwegen and Erf,

2010). In 2011, for almost all European countries, the fertility rate was below this replacement

3

level (cf. Figure 1). In particular, the figures for Portugal, Spain, Italy, Austria and Greece are

far below that replacement rate. The average fertility rate for these five countries is below 1.5.

Figure 1: Fertility rates in European countries, 2000 – 2011

Source: Eurostat (2012).

It is important to note that a decrease in the fertility rate alone will not turn a country into an

ageing country; along with this, a lower mortality rate and increasing life expectancy have

played an important joint role as well (Dalgaard, 2005).

This structural ageing of the population has profound consequences on the economic growth

of countries. Most economists argue that a country with a higher proportion of the older age

group tends to be associated with lower productivity levels and savings and higher

government spending (Bloom et al., 2010; Mèrette and Georges 2009; Sharpe, 2011; Walder

and Döring, 2012). This demographic tendency also makes room for an increase in the age

dependency ratio, meaning that the smaller working age group will be obliged to care for the

older age group (Lindh, 2004).

Although there is a myriad of important theoretical and empirical contributions on the ageing

population, these contributions are diffuse and lack an integrated vision of the various

mechanisms through which an ageing population impacts on economic growth. Thus, the

main goal of this paper is to provide an in-depth survey of the literature on the interaction

mechanisms between population ageing and economic growth.

Our paper is structured as follows. In Section 2, we provide a general overview of the

literature on population ageing and economic growth, giving an account of the main

mechanisms through which this influence occurs. Section 3 details the empirical studies in the

area and Section 4 offers some concluding remarks.

1,00

1,20

1,40

1,60

1,80

2,00

2,20

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Denmark Finland Austria Ireland Germany France

1,00

1,10

1,20

1,30

1,40

1,50

1,60

1,70

1,80

1,90

2,00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Greece Spain Portugal Italy

4

2. The impact of an ageing population on economic growth: main mechanisms

2.1. An overview of the interaction between ageing and growth

The inequality in age structure leads to demographic transition and can have a positive effect

on growth if the proportion of the active working age group is higher than the non-working

group (Lee et al., 2011). However, as the European Commission (EC) (2006) highlights, a

contrary situation is being delineated, featuring a relatively higher proportion of the non-

working group, especially retirees, in many developed countries. This phenomenon means

that most industrial countries are classified as ageing population countries (Weil, 2006).

According to Bloom et al. (2010), the current global life expectancy is 65 years and this is

projected to increase to 75 years by 2050. For example, the life expectancy of Japan has been

the highest in the world since 2000 (Weil, 2006; Lee et al., 2011). Moreover, since the growth

of current working group is higher than the future population growth, the future working

population group will be smaller than the retirees, and this is one of the causes of the ageing

population in Japan.

Most of the literature argues that there is a negative relationship between population ageing

and economic growth (Narciso, 2010; Bloom et al., 2010; Lisenkova et al., 2012; Walder and

Döring, 2012). Even so, some authors, such as Prettner (2012) and Lee et al. (2011), claim the

existence of a positive effect. According to Prettner (2012), older individuals tend to save

more and so there tend to be more resources available for investment, impacting positively on

growth. A longer life span will further enable investment in Research and Development

(R&D). Therefore, the rise in longevity will increase savings and the savings time span,

which will positively influence investment, particularly in R&D, which is consensually

recognized as the engine of economic growth (Aghion and Howitt, 1992).

As Figure 2 highlights, the increase in the ageing population via medical advances and the

less altruistic behaviour of couples affects economic growth mainly through three

mechanisms: consumption and saving patterns, public social expenditure, and human capital

(Bakshi and Chen, 1994; Tosun, 2003; Alders and Broer, 2004; Elmeskov, 2004; Lee et al.,

2007).

5

The next section looks at these mechanisms in more detail. It is important though to

acknowledge the existence of a reverse causality between these two phenomena - in other

words economic growth may also influence the determinants of an ageing population.1

Figure 2: Main mechanisms through which an ageing population impacts on economic growth

Source: Authors’ design

2.2. Consumption and saving patterns

Some authors (e.g., Hock and Weil 2012; Walder and Döring, 2012) content that the increase

in the ageing population will lead to a fall in consumption, which ultimately deprives growth.

The argument runs as follows: an increase in the elderly population tends to reduce the per

capita income of the three generations, child, working group and retiree, and this will mean a

net decrease in the total consumption of the family (Lee et al., 2007).

To Hock and Weil (2012) consumption patterns are affected by ageing through disposable

income. Indeed, the increase in the old age dependency ratio will reduce the disposable

1 Given that this paper focuses on the impact of ageing on growth, the important issue of reverse causality will not be developed. A few studies on the causes of an ageing population (e.g. Bloom and Williamson, 1998; Hodgson, 1988; Alders and Broer, 2004; Elgin and Tumen, 2010; Dalgaard et al., 2012). Alders and Broer (2004) and Elgin and Tumen (2010) argue that a country’s economic growth negatively affects its population growth and its fertility rate. Specifically, Alders and Broer (2004) show that the fertility rate tends to decline when there is a positive productivity shock - this shock increases the cost of having children and creates a substitution effect between children and the consumption of goods. Moreover, increasing returns on human capital will increase investment and raise labour force participation, inducing a decline in fertility rates since couples now choose to allocate their time resource between child bearing, investment in human capital and work; this means fewer children. The international financial and economic crisis also has an important impact on demographic variables. The significant increase in unemployment rates and the income reduction observed during the crisis is contributing to a reduction in the fertility rate, especially for developed countries, since families have a greater role in supporting children than the elderly (Weil, 2006; Sobotka et al., 2010).

6

income of the working population, resulting in a decrease in the fertility rate and further

reinforcing population ageing.

Private consumption has a considerable influence on demand (Walder and Döring, 2012).

Therefore, the demand for goods and services is crucial for defining both the production

structure and the labour market, which are directly influenced by the age composition of a

country’s population.

The saving rate decreases for retirees as saving becomes the source of their spending (Davies

and Robert III, 2006). Hence, the ageing population will increase the dependency ratio in a

family. An increase in the child dependency in a family will lead to a significant decline in the

per capita income of the child generation alone (Lee et al., 2007). Moreover, an increase in

the old age dependency will lead to a significant decline in both child and worker generations

(Lee et al., 2007). This means that, as already noted, the increase in the ageing population will

decrease the overall consumption of the family.

Focusing on changes of the composition of aggregate basket of consumption derived from

ageing, Mèrette and Georges (2009) claim that ageing population will prompt changes in

consumption patterns such as a higher demand for health services and a lower demand for

housing. Such changes in the demand for goods and services will definitely influence the

economic growth of a country.

2.3. Public social expenditure

Taxation is relied on as the major source of income for a government agency. Rise in the

ageing population will affect government revenue from taxes and increase government

spending, especially on health care, the pension system and other old age related benefits

(Tosun, 2003; Elmeskov, 2004).

On the one hand, taxes directly provoke an increasing deficit in the government budget. In

fact, strategies whereby government agencies raise taxes to accommodate pension and

medical expenses affect the disposable income of the working group, which tends to result in

a decline in the fertility rate (Hock and Weil, 2012). Consequently, this type of response will

further enhance the ageing problem. For instance, the ageing population in New Zealand

means that social expenditure as a percentage of gross domestic product (GDP) is predicted to

increase from 22.7% in 2001 to 31.0% in 2051 (Creedy and Scobie, 2002). As such,

population ageing tends to cause significant changes in government budget allocation.

According to Eiras and Niepelt (2012) and Lisenkova et al. (2012), population ageing will

7

increase government spending on social security against the allocation for education and

infrastructure investment, which ultimately impact (negatively) on economic growth.

2.4. Human capital

According to some authors, such as Bloom et al. (2010), the increase in the retirement age and

immigration will in fact help to overcome the decrease in the labour force. Other authors

claim that countries can sustain economic growth despite the ageing population problem. For

instance, Elgin and Tumen (2010) states that faced with a decline in human capital, the

economy will switch from traditional production (that uses young workers) to new human

capital oriented production (that uses old age workers). Therefore, in this line of

argumentation, an ageing population will affect neither the production nor the growth

dynamics. Furthermore, Elgin and Tumen (2012) also argue that modern economies rely more

on machines than labour force. Therefore, a fall in the labour force will have no effect on

productivity. According to the authors, labour can be replaced by machines. They believe that

this means that a decrease in the young working group has no effect on economic growth.

Lisenkova et al. (2012) have a contrasting view of this phenomenon, though. They find that

even though increasing the retirement age will help to overcome a decreasing labour market,

workers of different ages are not perfect substitutes and so there will definitely be a decline in

productivity per worker. Other authors also stress the negative impact of population ageing

and the associated decrease in a country’s stock of human capital (Narciso, 2010), with a

subsequent negative influence on economic growth. Accordingly, an ageing population will

decrease the labour force, which will then affect economic growth due to lower productivity

levels. Even though the higher participation of women in the labour force increases labour

productivity, this participation will further lower the fertility rates, which will eventually lead

back to the initial problem (Alders and Broer, 2004).

There is also the argument that, apart from the increase in the retirement age, higher

immigration is unable to help much with overcoming public spending due to this ageing

problem, as immigrants will also have rights under the pension and health care system

(Elmeskov, 2004). Despite the negative effect on human capital accumulation identified by

Lindh (2004), Ludwig et al. (2011) and other authors argue that, for the US economy,

increasing human capital investment will reduce the impact of an ageing population. The

endogenous human capital through formal schooling and on-the-job training programmes will

positively influence human capital technology (Ludwig et al. 2011). Hence in the case of the

US, Ludwig et al. (2011) report that when we allow for endogenous human capital

8

accumulation the welfare losses in terms of lifetime consumption increase only about 8.7%,

whereas when human capital is assumed as exogenous, these losses rise to 12.5% (assuming

that replacement rates to the pension system are constant).

3. Surveying the empirical studies assessing the impact of ageing on economic growth

Although high quality empirical research on the impact of an ageing population on countries’

economic growth does exist, (this latter often proxied by GDP growth rates) this literature is

still relatively scarce. Table 1 summarizes some of the most relevant studies in this area,

highlighting the main mechanisms through which ageing impacts on growth: consumption

and saving patterns, public social expenditure and human capital. Attention is paid to

assessing the possible distinct impact of ageing on economic growth depending on the

mechanism focused on, econometric estimation techniques used and countries analysed.

3.1. The effect of an ageing population through consumption and saving patterns

Few empirical studies have addressed the impact of ageing on growth through consumption

and saving patterns. The two studies summarised in Table 1 focused on the influence of an

ageing population on the economic performance of China and Taiwan. Even though Taiwan

and China had a common history in the past, the empirical analysis undertaken on these two

countries shows contrasting results. Li et al. (2012) showed that there is an increase in savings

and investment in China by an ageing population and this is expected to boost the economic

growth of the country. Whereas, in the case of Taiwan, Lee et al. (2007) found that the

increase in the ageing population will negatively affect the income per capita of families.

Analysing the impact of the old age dependency ratio on Chinese savings and investment

(controlled for other variables such as the working age population and population growth

rate), for the period 1985 to 2005, Li et al. (2012) demonstrate that ageing has a positive

effect on both savings and investment. The authors note that China’s imperfect social security

system (policies including family planning, child bearing, pension and marriage) is the reason

for the increase in savings among older people. The government’s one-child policy system

and Pay-As-You-Go (PAYG) pension plan make the current working group start saving for

their future expenses.

The statement that economic growth increases with the old age dependency ratio is further

borne out by estimation results. However, the authors failed to show a significant relationship

between the working age population and savings or investment rates. Finally, their results

show a negative impact of the population growth rate on either the savings rate or investment

9

rate. The authors stress that the increase in the number of children in China will result in

additional consumption needs and this will reduce people’s savings and investment capacity.

On the other hand, Lee et al. (2007) state that when a country faces demographic burdens due

to having a smaller working group and larger non-working group, the dependency ratio will

increase and this will reduce families’ per capita income. They analysed the impact of old age

dependency ratio on the per capita income of family members (child generations, worker

generations and old-age generations). In fact, when using the population dependency method

to compute the dependency ratio for Taiwan, Lee et al. (2007) introduced a new method

called ‘the family dependency ratio’. Using this, the authors computed the dependency ratio

as the number of pensioners per family to the number of workers per family. The main

reasons for using the family dependency ratio instead of the population dependency ratio

were: i) the population dependency ratio is less accurate in capturing the impact of the relative

number of working family members over the lifecycles of families; ii) the family dependency

structure is different among cohorts, whereas the population dependency structure has the

same cohorts. The model assumes that no saving or per capita consumption of each generation

is determined by an altruistic family utility function (Lee et al., 2007). Thus, the consumption

of each dependent generation is equal to that generation's labour income plus net family

transfers. The estimated results for the period 1951 – 2101 show that an increase in the old-

age dependency ratio will significantly reduce the per capita income of all three generations

(children, workers and elderly). The possible reason for the contrasting results is that the two

authors (Lee et al., 2007; Li et al., 2012) analysed the influence of ageing based on different

mechanisms: savings and income per capita and the variables were measured by Li et al.

(2012) through the total amount of savings and investment, whereas Lee et al. (2007)

measured the variables in per capita terms. If the authors had used the same method to

measure the variables they would have obtained similar results.

3.2. The effect of ageing on economic growth through public social expenditure

Ageing populations do affect public social expenditure in many ways. Empirical analysis has

been carried out to identify the influence of ageing populations through foreign direct

investment (FDI) (Davies and Robert III, 2006; Narciso, 2010), foreign portfolio investment

(FPI) (Narciso, 2010) and GDP per worker growth rate (Lindh et al. 2009).

Davies and Robert III (2006) and Narciso (2010) analysed the influence of an ageing

population on a country’s FDI and FPI (Davies and Robert III, 2006; Narciso, 2010). Overall,

10

Davies and Robert III, (2006) and Narciso (2010) show a significant negative correlation

between the old dependency ratio and FDI for the countries studied.

Davies and Robert III (2006) use the OLS method to test the determinants of US inbound and

outbound FDI for 55 countries for the period 1983-1998, whereas Narciso (2010) tested the

relation between both old-age dependency ratio and youth-age dependency ratio and FDI and

FPI in 8 home OECD countries, for the period 2001-2007. As is usual in the literature, Davies

and Robert III (2006) compute the dependency of the home country and host country by

dividing the old-age individuals and the population of young individuals. According to Davies

and Robert III (2006), FDI is negatively correlated with both the home-country dependency

ratio and the host-country dependency ratio. This means that an increase in the old-age

dependency ratio of either the home or host country will significantly reduce US FDI in

general. However, when the authors test this relationship separately for poor countries and

rich countries, different results emerge. Even though changes in the dependency ratio of rich

host countries still have a negative correlation with US FDI (outbound), the related changes of

rich home countries have no significant impact on inbound flows (Davies and Robert III

2006). For the estimation of poor countries alone, changes in the home countries’ dependency

ratio have a negative correlation with US FDI (inbound) and no significant estimated impact

on US FDI (outbound) exists relative to the changes in host countries. Narciso (2010) tests

two relationships: between old age dependency ratio and FDI, and between old age

dependency ratio and FPI, with a negative correlation emerging for both. Moreover, for the

youth dependency ratio, there is a positive correlation with FDI and FPI. Hence, both Davies

and Robert III (2006) and Narciso (2010) provide generally similar results. The impacts of

FDI and FPI due to an ageing population will consecutively affect the GDP growth of the

countries.

11

Table 1: S

tudies on the impact of an ageing populat

ion on economic perform

ance (…

)

Mechanism

S

ample

Tim

e Period

Methodology

Dependent (in case of econom

etric m

odel) / Endogenous (in case of

simulation) variable

Independent (in case of econom

etric model) /

Exogenous (in case of

simulation) variable

Effect

Author

Co

nsu

mp

tion

and

savings

Pattern

s

Ch

ina

19

85 –

2005

-Pan

el data.

-Gen

eralized M

ethod

o

f Mo

men

ts(GM

M)

Savin

gs

(total am

ou

nt)

Old

age dep

end

ency ratio

(o

ld age 65

and ab

ove)(1)

Po

sitive Li et al. (2

012

) In

vestmen

ts (to

tal amo

un

t) O

ld age d

epen

den

cy (age 6

5

and

above)( 2)

Po

sitive

Taiw

an

Po

pulation

Fo

recasting:

19

51 –

2101

. In

1998

: interview

ed

14

,031

hou

sehold

s and

52

,610

ind

ividuals.

-Overlap

pin

g fam

ilies (O

LF) m

od

el (usin

g in

tergeneratio

nal

fam

ilial effect).

- Ord

inary Le

ast S

qu

ares (OLS

) estim

ation

.

Per cap

ita inco

me o

f child

generatio

ns O

ld-age d

epen

den

cy ratio(3)

Negative

Lee et al. (2

007

) P

er capita in

com

e of w

orker

generatio

ns

Negative

Per cap

ita inco

me o

f old

-age gen

eration

s N

egative

Pu

blic so

cial exp

end

iture

US

inbou

nd an

d outbo

und

Fo

reign direct in

vestmen

t (F

DI) fo

r 55

coun

tries (e.g. G

erman

y, Brazil,

Au

stria, Ch

ina an

d etc.)

19

83 –

1998

OLS

meth

od

US

Fo

reign direct in

vestmen

t (FD

I) (In

boun

d) fo

r all coun

tries H

om

e cou

ntry d

epen

den

cy ratio

(4) N

egative

Davies an

d

Ro

bert III

(200

6)

US

FD

I (O

utbo

und

) for all co

untries

Ho

st coun

try dep

end

ency

ratio(5)

Negative

OLS

meth

od

FD

I (Inbo

und

) for th

e group

of rich

co

un

tries H

om

e cou

ntry d

epen

den

cy ratio

(6) N

o sign

ificant

relation

FD

I (Ou

tboun

d) fo

r the grou

p o

f rich

cou

ntries

Ho

st coun

try dep

end

ency

ratio(7)

Negative

OLS

meth

od

FD

I (Inbo

und

) for th

e group

of po

or

cou

ntries

Ho

me co

un

try dep

end

ency

ratio(8)

Negative

FD

I (Ou

tboun

d) fo

r the grou

p o

f po

or co

un

tries H

ost co

untry d

epen

den

cy ratio

(9) N

o sign

ificant

effect

8 sou

rce cou

ntry (OE

CD

). 3

8 h

ost co

untry (O

EC

D

and

non O

EC

D).

20

01 –

2007

Balan

ced p

anel d

ata (fixed

effects)

FD

I (Investm

ent o

f origin

country in

a d

estination

coun

try j) O

ld d

epen

den

cy ratio (age

65

and abo

ve) (10) N

egative N

arciso

(201

0)

Fo

reign po

rtfolio in

vestmen

t (FP

I) (In

vestmen

t of o

rigin cou

ntry in

a d

estination

coun

try j) O

ld d

epen

den

cy ratio (11) N

egative

OE

CD

cou

ntries

19

50 –

2004

Po

oled

Ord

inary L

east S

qu

ares (PO

LS)

meth

od

Gro

wth

rate of real G

DP

per w

orker

Age 5

0 –

64

(12) P

ositive

Lind

h et al.

(200

9)

EU

15 excep

t Luxe

mb

urg

G

row

th rate o

f real GD

P p

er wo

rker A

ge 50

– 6

4(13)

Po

sitive

OE

CD

cou

ntries

19

50 –

2004

Po

oled

Ord

inary L

east S

qu

ares (PO

LS)

meth

od

Gro

wth

rate of real G

DP

per w

orker

Age 6

5 an

d ab

ove

(12) N

egative

EU

14 (excep

t Luxe

mb

urg

in th

e EU

15)

Gro

wth

rate of real G

DP

per w

orker

Age 6

5 an

d ab

ove

(13) N

egative

12

(1

) W

orking a

ge pop

ula

tion grow

th ra

te (0); p

opu

lation

growth

rate (-); Lo

g jun

ior high

school en

rolmen

t (0

); log sen

ior high

school en

rolmen

t rate (0

); 5 yea

r lagg

ed log G

DP

(0); Log

FD

I sha

re (0); du

mm

y var

iab

les for time p

eriods

1990

– 1

995 (0

) ,1995

– 2

000 (0

), Period

2000

– 2

005

(0).

(2)

Log old a

ge d

epen

den

cy ratio (+

); workin

g age p

opu

lation gro

wth

rate (0

); popu

lation

growth

rate (-);

Log ju

nior h

igh sch

ool enrolm

ent (0

); log senior high

school en

rolmen

t rate (+

); 5 yea

r lag

ged log G

DP

(-); Log FD

I sha

re (0);

du

mm

y varia

bles for tim

e period

s 1990 –

1995

(0) ,1

995 –

2000

(0), P

eriod 2

000 –

2005

(0).

(3)

Ea

rnings of w

orkers (+); ea

rnin

gs of child

ren (+

); ea

rnin

gs of pen

sioners rela

tive to workers (+

); chi

ld dep

endency ra

tio (-); old a

ge dep

enden

cy ratio (

-); pop

ulation d

epen

dency ra

tio (-). (4

) H

ome d

epen

den

cy (-); Hom

e social secu

rity (-); Hom

e n

ationa

l savin

gs (-); Hom

e Investm

ent (0

); Hom

e GD

P (+

); Hom

e Skill (w

orkers skill level) (+

); Hom

e Trade C

ost (-); FX

(Excha

nge ra

te) (-); Distan

ce (-); T

rend

(0); R

ich

(deve

loped

countries).

(5)

Host d

epend

ency (+

); Host socia

l security (-); H

ost n

ational sa

vings (-); H

ost Investm

ent (-); H

ost GD

P (+

); Host S

kill (workers skill level) (+

); Host Trad

e Cost (0

); Host In

vestmen

t cost (-); FX

(Exch

ange ra

te) (+); D

istance (-);

Tren

d (0

); Rich (d

eveloped

countries) (-).

(6)

Hom

e dep

end

ency (0

); Hom

e social secu

rity (+); H

ome

nation

al sa

vings (+

); Hom

e Investm

ent (-); H

ome G

DP

(+); H

ome S

kill (workers skill leve

l) (+); H

ome Trad

e Cost (-); F

X (E

xchange ra

te) (-); Distan

ce (-); T

rend

(0).

(7)

Host d

epend

ency (-); H

ost social secu

rity (0); H

ost n

ational sa

vings (0

); Host In

vestmen

t (+); H

ost GD

P (+

); Host S

kill (wo

rkers skill. level) (0

); Host

Tra

de C

ost (-); Host In

vestmen

t cost (-); FX

(Exch

an

ge rate) (+

); Distance (-);

Tren

d (0

). (8

) H

ome d

epen

den

cy (-); Hom

e social secu

rity (-); Hom

e n

ationa

l savin

gs (-); Hom

e Investm

ent (-); H

ome G

DP

(+); H

ome S

kill (workers skill level) (+

); Hom

e Trade C

ost (-); FX

(Exch

ange ra

te) (0); D

istance (-)

; Tren

d (0

). (9

) H

ost dep

end

ency (+); H

ost social secu

rity (-); Host

na

tiona

l savin

gs (-); Host In

vestmen

t (0); H

ost GD

P (+

); Host S

kill (workers skill level) (+

); Ho

st Trade C

ost (0); H

ost Investm

ent cost (-); F

X (E

xcha

nge ra

te) (+); D

istance (-); T

rend

(0).

(10

) G

DP

in a

capita

l origin coun

try (+); G

DP

in a

capit

al d

estination

country (+

); Ma

rket capita

lization

leve

l of the ca

pita

l destina

tion coun

try (0); G

ross

capita

l forma

tion on

destin

ation cou

ntry (-); Na

tion

al p

olitical stab

ility on the

destin

ation country (0

); Econ

omic freed

om a

nd

prosperity in

the d

estination

country (0

); Old

age d

epen

den

cy ratio of th

e destin

ation cou

ntry (-); You

th age d

epend

ency ra

tio of the d

estination

country (+

); O

ld d

epend

ency ratio

forecast in 20

years’ tim

e of the origin

country (+

); You

th d

epend

ency ra

tio forecast in 20

years’ tim

e for the d

estination country(+

). (1

1)

GD

P in

a ca

pital origin

country (+

); GD

P in

a ca

pita

l destin

ation cou

ntry (+); M

arket cap

italiza

tion l

evel of th

e ca

pital d

estination

country (0

); Gross ca

pital form

ation

on d

estination

country (-); N

ati

ona

l politica

l stability on

the d

estination coun

try (0); E

conom

ic freedom

an

d p

rosperity in

the d

estination

country (0

); Old

age d

epen

den

cy ratio of th

e destin

ation cou

ntry (-); You

th age d

epend

ency ra

tio of the d

estination

country (+

); O

ld d

epend

ency ratio

forecast in 20

years’ tim

e of the origin

country (+

); You

th d

epend

ency ra

tio forecast in 20

years’ tim

e for the d

estination country(0

). (1

2)

Th

e inverse of th

e converg

ence term

(+); P

opu

lation sha

re of ag

e group

(15-29

) (0); P

opu

lation sh

are o

f age grou

p (30

– 4

9) (0

); Pop

ulation

share of a

ge g

roup

(50

– 64

) (+); P

opula

tion sha

re of ag

e group

(65

and

above) (-); a

verag

e

investm

ent sha

re (+); a

verage gro

wth

rate of th

e wo

rk force (-); initial leve

l of GD

P p

er worker (-).

(13

) T

he in

verse of th

e conve

rgence te

rm (0

); Popu

lation

share of a

ge grou

p (1

5-2

9) (0

); Pop

ulation

sha

re of a

ge group

(30

– 4

9) (0

); Pop

ulation

sha

re of age

grou

p (5

0 –

64) (+

); Pop

ulation

sha

re of ag

e group

(65

and

above) (-); a

verage

investm

ent sha

re(+); a

verage gro

wth

rate of th

e wor

k force (-); initial leve

l of GD

P p

er worker(0

). (1

4)

log cap

ital (+

);dum

my va

riab

les for age [20,2

5) (-), [25

,30) (0

), [30,35

) (+), [4

0 45) (0

), [45,50

) (0),[50

,55

) (-),[55,6

0)(-);w

omen

(-); Ge

rma

ns (0

); Ap

pren

ticeship

s (+); un

skilled (0

); high

skilled (0

); w

hite-colla

r (+); pa

rt time (+

); good

equ

ipm

ent (+); A

ge-d

ispersion (0

); Exp

ort (+);

nu

mb

er of workers (+

); East G

erma

ny (-);d

um

my va

riab

les for cohort [190

0,1930

) (0), [1

930,1

940) (0),

[1940

,195

0) (+

), [1960

,1970

) (0), [1970

,1980

) (-), [1

980,1

900) (-);

du

mm

y varia

bles for ten

ure [10

,20

) (0), [20,3

0) (+

), [30

,40)(0

), [40, 50

) (+).

(15

) log ca

pita

l (+);du

mm

y varia

bles for age [20

,25

) (0)

, [25,30

) (0), [3

0,35) (0

), [40 4

5) (0

), [45,5

0) (0), [5

0,55) (0

), [55,60

)(0); w

omen

(0); G

erma

ns (0

); A

pp

renticesh

ips (+

); un

skilled (-); h

igh skilled

(0

); wh

ite-collar (+

); part tim

e (0);

good eq

uip

ment (+

); Age

-disp

ersion (-); Exp

ort (+);

num

ber of w

orkers (0); E

ast Germ

an

y (-); constant (+

);dum

my va

riab

les for cohort [19

00,19

30) (0

), [1930

,1940

) (0), [19

40,19

50) (0

), [1960

,1970

) (0), [197

0,1980

) (-), [198

0,1900

) (-); dum

my va

riables for ten

ure [10

,20)

(0), [20

,30) (0

), [30,40)(0

), [40, 5

0) (0

). (1

6)

Log cap

ital (+

);dum

my va

riab

les for age [20

,25

) (0)

, [25,30

) (0), [3

0,35) (0

), [40 4

5) (0

), [45,5

0) (-), [50

,55

) (-), [55,60

)(-); wom

en (-); G

erm

an

s (0);

Ap

prenticesh

ips (+

); un

skilled (-); h

igh skilled

(0

); wh

ite-collar (+

); part tim

e (0);

good eq

uip

ment (+

); Age

-disp

ersion (-); Exp

ort (+);

num

ber of w

orkers (0); E

ast G

erma

ny (-); con

stant

(+);d

um

my va

riab

les for [1900

,1930

) (-),[1930,1

940)

(0), [19

40,19

50) (+

), [1960,19

70) (0

), [197

0,1980

) (0

), [1980

,1900) (-);

du

mm

y varia

bles for ten

ure [10

,20

) (0), [20,3

0) (0

), [3

0,40)(0

), [40, 50

) (0).

Mechanism

S

ample

Tim

e Period

Methodology

Dependent (in case of econom

etric m

odel) / Endogenous (in case of

simulation) variable

Independent (in case of econom

etric model) /

Exogenous (in case of

simulation) variable

Effect

Author

Hu

ma

n cap

ital

Germ

an

y 1

997 –

2005

-Dyna

mic G

eneralized

Methods of M

om

ents

(GM

M)

Ma

nufacturing (P

roductivity) A

ge [50 –

55) a

nd Age [55

-6

0) (labour productivity) (14)

No effect

Gö

bel an

d

Zw

ick (2

012

) S

ervices (Productivity)

Age [50

– 5

5) and A

ge [55-

60) (lab

our productivity) (15) N

o effect

Meta

l Working sectors (P

roductivity) A

ge [50 –

55) a

nd Age [55

-6

0) (labour productivity) (16)

No effect

Scotla

nd 2

006 –

2106

(Foreca

sting) O

LG m

odel.

Sim

ulation

Outp

ut per- p

erson W

ith age sp

ecific features. C

hanges in the

output is higher

Lisenkova

et a

l. (2012)

Outp

ut per- p

erson W

ithout age sp

ecific features. C

hanges in the

output low

er

13

Lindh et al. (2009) studied the trend between OECD and EU countries. The authors analyse

the influence of an ageing population on real GDP per worker growth rate in the OECD and

EU 15 countries (except Luxembourg). In order to minimize the endogeneity issues, instead

of GDP per capita, the authors considered GDP per worker has a dependent variable. They

conclude that for these countries changes in the population for the age 65 and above have a

significant negative impact on real GDP per worker growth rate. According to the authors,

when there is an escalation in the old age group (age 65 and above), the growth rate of GDP

per worker will decline. Therefore, the result confirmed that the demographic transition does

affect GDP growth.

3.3. The effect of an ageing population on human capital

If workers of different ages are not perfect substitutes, the productivity level of the particular

worker will be lower with an ageing population, considering their physical ability to actively

participate in the labour market (Lisenkova et al. 2012). Even though both Göbel and Zwick

(2012) and Lisenkova et al. (2012) agree that, in general, the impact of an ageing population

on labour productivity is negative, Göbel and Zwick (2012), based on an empirical study,

state that the level of this effect will differ according to the sectors analysed.

Göbel and Zwick (2012) looked at the differences in the age productivity profiles between the

metal manufacturing sector and the service sector in Germany, for the period 1997–2005.

Using the generalised method of moments (GMM) as an estimation tool, the authors obtained

results showing that for the labour age group at the age 55–60 there is no significant effect on

productivity in the metal manufacturing and service sectors. Hence, the study concludes that

an increase in the old-age group in Germany has no effect on the productivity in the two

analysed sectors. However, Lisenkova et al. (2012) explain that, in general, regardless of the

sector in focus, the age-specific effect will influence productivity in Scotland.

Lisenkova et al. (2012), setting out to see if the age specific features significantly influence

output productivity in Scotland, predict its output level for the period 2006 – 2106, based on a

simulation exercise. The results show that when age-specific features are not taken into

account changes in the output level are lower, whereas when age-specific effects are

considered, these changes will be higher. According to the authors, since the physical

strength of human beings declines as they get older so increasing the retirement age and

having more old-age labour will definitely negatively affect output productivity.

14

4. Some final remarks on the relation between ageing and economic growth

The demographic dividend through industrialization has improved the economic growth of

developed countries (Bloom and Williamson, 1998). Although government policy on fertility

control has benefited developed countries, the demographic dividend achievement did not last

forever. The unbalanced population structure has led to many developed countries being

christened ‘ageing countries’ (Bloom and Williamson, 1998). An ageing population and

economic growth are related, as extensively discussed above. The current ageing problem

faced by many developed countries is occurring, however, without any past history. Hence,

these ageing impacts might be considered a new experience for the world.

Our review of the literature has led us to conclude that an ageing population has affected

economic growth through three main mechanisms: consumption and saving patterns, public

expenditure, and human capital. This literature review shows that the impact of ageing on

countries’ performance is intimately related to the mechanism chosen. Indeed, about 70% of

the empirical studies that focused on ‘public social expenditure’ convey a negative impact of

ageing on economic performance, whereas the majority (60%) of empirical studies that focus

on human capital do not find any significant statistical relation between ageing and the

economic growth proxy, and the positive impact is much more related to the ‘consumption

and saving patterns’ mechanism (cf. Figure 2). In short, the mechanism seems to have a non-

trivial impact on the estimated relation between ageing and economic growth.

Figure 3: Estimated impact of ageing on economic growth by main mechanism

Note: The analysis was based on 26 econometric estimations reported in the studies surveyed and listed in Table 1. Source: Authors’ computations.

60.0

20.0

68.8

57.7

0.0

60.0

12.5

19.2

40.0

20.0 18.823.1

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Consumption and savings

patterns

Human capital Public social expenditures All

Positive

No effect

Negative

#26#16#5

#5

15

Estimation methodologies also seem to be associated with distinct impacts of ageing on

economic growth. Indeed, as Figure 4 shows, less sophisticated econometric methods (i.e.,

OLS and panel) are most often associated with negative (cor)relations, whereas overlapping

generation methods and the generalized method of moments (GMM) are more likely to

generate positive or no significant effects.

Figure 4: Estimated impact of ageing on economic growth by main methodologies of analysis

Note: The analysis was based on 26 econometric estimations reported in the studies surveyed and listed in Table 1. Source: Authors’ computations.

The evidence gathered helps little in assessing to what extent the impact of ageing on growth

varies according to the mechanisms and countries analysed. The bulk of the empirical

evidence concerns developed countries and the ‘public social expenditure’ mechanism, with

most of the analysis indicating a negative and significant relation between ageing and growth.

It is important, however, to acknowledge that developed, developing and even the least

developed countries are affected by the ageing population phenomenon. As Börsch et al.

(2002) state, ageing population patterns are similar in most countries; the only observable

difference concerns the timing of the situation. Furthermore, an ageing population’s influence

on economic growth has been labelled as ‘remarkable’, especially during the current financial

and economic crisis (Lee et al., 2011). Several economic studies (e.g. Creedy and Scobie,

2002; Alders and Broer, 2004; Weil, 2006; Sobotka et al., 2010) not only confirm the

existence of ageing populations all over the world, but also document and analyse the

mechanisms that influence economic growth, as well as proposing possible remedies to solve

the problem.

80.0

40.0

75.0

0.0 0.0

50.0

100.0

57.7

20.0

0.0

0.0

0.0

100.0 0.0

0.0

19.2

0.0

60.0

25.0

100.0

0.0

50.0

0.0

23.1

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

OLS method Pooled OLS Panel data Generalized

Method of

Moments(GMM)

Dynamic

Generalized

Methods of

Moments (GMM)

Overlaping

generation model

Simulation All

Positive

No effect

Negative

#26#10 #5 #4

#1

#3

#2

#1

16

Figure 5: Estimated impact of ageing on economic growth by main countries blocks analysed

Note: The analysis was based on 26 econometric estimations reported in the studies surveyed and listed in Table 1. Source: Authors’ computations.

The movement both developed and developing countries are going through, featuring a

convergence to the era of ageing populations, has its own consequences for economic growth

dynamics through the distinct mechanisms detailed above: consumption and saving patterns

(Fougère et al., 2009; Li et al., 2012; Walder and Döring, 2012), human capital (Elgin and

Tumen, 2010; Sharpe, 2011; Göbel and Zwick., 2012), and public social spending (Creedy

and Scobie, 2002; Tosun, 2003; Elmeskov, 2004; Hock and Weil, 2012).

Realizing the seriousness of the issues raised by ageing populations, policy makers are

desperate to find ways to tackle the issues. Policy implications such as the ‘Blue card’ system

introduced by European countries to encourage foreign immigration to overcome labour

shortages, increasing the retirement age to lower government expenditure, increasing the

working group’s income tax and social planning whereby couples are encouraged to have

more children are considered the major ones. However, for some reason, general policy plans

are not yet regarded as an effective way to solve the problem. Knowing the degree to which

the influence of ageing varies from country to country, and through which mechanisms, is

essential to specifying adequate policies.

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20

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Editorial Board (wps@fep.up.pt)Download available at: http://wps.fep.up.pt/wplist.php

also in http://ideas.repec.org/PaperSeries.html

22