Demographic Change, Human Capital and Welfare

Alexander Ludwig, Thomas Schelkle () and Edgar Vogel

No 10196, MEA discussion paper series from Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy

Abstract: This paper employs a large scale overlapping generations (OLG) model with endogenous human capital formation using a Ben-Porath (1967) technology to evaluate the quantitative role of human capital adjustments for the economic consequences of demographic change. We find that endogenous human capital formation is a quantitatively important adjustment mechanism which substantially mitigates the macroeconomic impact of population aging. On the aggregate level, the predicted decrease of the rate of return to physical capital is only one third of the predicted decrease in a standard model with a fixed human capital profile. In terms of welfare, while young agents with little assets gain up to 0.8% in consumption from increasing wages in both models, welfare losses from decreasing returns of older and asset rich households are substantial. But importantly, these losses are about 50 − 70% higher in the model without endogenous human capital formation. Ignoring this adjustment channel thus leads to quantitatively important biases of the welfare assessment of demographic change. We also document that not reforming the social security system but letting contribution rates increase will largely offset any positive welfare effects for future generations.

JEL-codes: C68 E17 E25 J11 J24 (search for similar items in EconPapers)
Date: 2010-01-15
New Economics Papers: this item is included in nep-age, nep-dge, nep-hrm and nep-ltv
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Citations: View citations in EconPapers (7)

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Journal Article: Demographic Change, Human Capital and Welfare (2012)
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