10.07 notes

Economics 398

Class of October 7, 2015

I. demographics

– First Demographic Dividend: changing age composition. When fertility falls, then we work through a shifting population. With 2% growth we have a population pyramid; we cycled through that for Japan.

When fertility falls, the base either stops expanding as fast or (cf. countries with a TFR total fertility rate below 2.1) shrinks. This is then like a meal moving through a snake: the bulge eventually hits the working age population, with a smaller group of young dependents and a still-small group of retirees.

Eventually we move towards an inverted pyramid and a negative dividend.

– variation across countries: consumption looks just like our life cycle savings model, flat. that’s not true of the US, with our huge costs of healthcare: there’s a sharp rise in consumption at older ages (it’s certainly not partying!!). the rest of the OECD is somewhere in between, a bit of an increase but not extreme

– Second demographic dividend: savings rates likewise rise then fall.

– Net: ceteris paribus the first dividend gives a boost to per capita income and to GDP growth. the second dividend generates savings to not only equip this larger (and increasingly older) labor force with capital, but to actually raise K/L. So we get reinforcement.

Addendum: not covered in class

– Smitka’s Third Demographic Dividend: falling fertility correlates with increased female labor force participation. This actually improves the initial impact of the first demographic dividend. However it’s a one-time change: it boosts incomes and growth up front, but then peters out as participation rates have an upper limit of 100%. There is to date no evidence of a major reversal of either fertility or female LF participation; it seems to be a one-way, one-time change (albeit gradual – over 20 years)