Demographic Change, Relative Factor Prices, International Capital Flows, and their Differential Effects on the Welfare of Generations

Alexander Ludwig, Dirk Krüger () and Axel Börsch-Supan ()
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Dirk Krüger: University of Pennsylvania, Postal: 3718 Locust Walk, Philadelphia, PA 19104, USA
Axel Börsch-Supan: Sonderforschungsbereich 504, Postal: L 13, 15, D-68131 Mannheim
Authors registered in the RePEc Author Service: Dirk Krueger

No 07-14, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: Demographic change has differential impacts on the welfare of current and future generations. In a simple closed economy, aging -- a relative scarcity of young workers -- increases wages, increasing the welfare of the young. At the same time, population aging will reduce rates of return to capital, thereby reducing the welfare of asset holders who are usually older than the population average. In a global world with pension systems, however, these effects are less straightforward, since international capital flows dampen the factor price changes. Moreover, pay-as-you-go pension systems financed by payroll taxes create a wedge between net and gross wages, and their intergenerational redistribution has important additional effects on the welfare of generations. To quantify these effects, we develop a large-scale multi-country overlapping generations model with uninsurable labor productivity and mortality risk. Due to the predicted relative abundance of the factor capital, the rate of return falls between 2005 and 2050 by roughly 90 basis points. Our simulations indicate that capital flows from rapidly ageing regions to the rest of the world will initially be substantial, but that trends are reversed when households de-cumulate savings. In terms of welfare, our model suggests that young individuals with little assets and currently low labor productivity indeed gain from higher wages associated with population aging. Older, asset-rich households tend to loose because of the predicted decline in real returns to capital.

Pages: 39 pages
Date: 2007-06-12
New Economics Papers: this item is included in nep-age, nep-dge and nep-opm
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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Citations: View citations in EconPapers (7)

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Related works:
Chapter: Demographic Change, Relative Factor Prices, International Capital Flows, and Their Differential Effects on the Welfare of Generations (2009)
Working Paper: Demographic change, relative factor prices, international capital flows, and their differential effects on the welfare of generations (2007)
Working Paper: Demographic Change, Relative Factor Prices, International Capital Flows, and Their Differential Effects on the Welfare of Generations (2007)
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