Academic journal article Seoul Journal of Economics

Effects of Population Aging on Economic Growth: A Panel Analysis

Academic journal article Seoul Journal of Economics

Effects of Population Aging on Economic Growth: A Panel Analysis

Article excerpt

This paper aims to assess the effects of population aging on economic growth. We adopt the partial-adjustment model to regress the per capita GDP growth rates of 80 countries from 1960 to 2005 against a set of independent variables including the levels and changes in the proportions of the young and elderly population. Unlike the young population, the segment of the elderly population in the total population (or relative to the working-age population) does not indicate a "demographic burden" and does not inhibit economic growth in the short and long terms. Thus, in many countries, behavior responses to population aging occur in the form of high retirement savings, high labor force participation, and increased immigration of workers from developing countries. Thus, appropriate policies can be implemented to mitigate the adverse consequences of population changes.

Keywords: Economic growth. Population, Age structure. Demographic transition

JEL Classification: J10, O10, O15, O49

I. Introduction

Most countries in the world have undergone an unprecedented transition in demographic behavior from high to low fertility and mortality rates after the end of World War II. This transition has resulted in rapid changes in the age structure of the population.

However, different countries are in different stages of an equally rapid transition in age structures. Many developed countries have populations that are among the oldest in the world, such as Japan, with a median age of nearly 45.9 years in 2013 (United Nations 2013). Many highincome countries, including Germany, Italy, Bulgaria, Greece, Austria. Croatia, Slovenia, Hong Kong, and Finland, are also among the 10 countries with the oldest population as of 2013.

Japan is projected to remain the oldest in the world with a median age of 55.8 years in 2050. Korea has a relatively younger population with a median age of 39.4 years in 2013. However, Korea is projected to become one of the five countries with the oldest population with a median age of 53.5 years in 2050.1

Most developed countries face a rapid increase in the number of elderly citizens. The populations of most developing countries are also poised to enter a period of rapid population aging (United Nations 2013). Given that population aging will decreases labor force participation and saving rates, population changes raise a valid concern on the possible deceleration of economic growth (Bloom, Canning, and Fink 2011).2

This paper assesses the effects of demographic transition on economic growth. Most literature on population focuses on the effects of the working-age population on economic growth (e.g., Bloom, and Williamson 1998; Bloom, Canning, and Sevilla 2001; Bloom, Craig, and Malaney 2000; Bloom, Canning, and Sevilla 2003; Mason 2007; Bloom, David, Gunther, and Jocelyn 2009) By contrast, the current paper compares the long- and short-term effects of an aging and youthful population on economic growth.

To the best of our knowledge, 2 studies have estimated the statistical association of the proportions of young and elderly populations with economic growth. The study conducted by Huh, Lee. and Lee (2003, 2007) uses a partial-adjustment model on the 1993 data of 77 countries for 2 years. The results indicate that a relatively large population of children and elderly has a negative effect on economic growth. They find that the relative size of the elderly in the total population has a greater negative effect on economic growth than an increase in the relative number of children. By contrast, Bloom, Canning, and Fink (2008) construct a panel dataset and show in a first-difference model that the rate of aging negatively and insignificantly affects growth in the short and long terms, respectively. This finding is caused by the mitigation of the negative effect of aging by behavioral responses, such as high retirement savings, high labor force participation, and increased immigration of workers from developing countries. …

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