Intertwining Inequality and Labor Market under the New Normal

Tanida Arayavechkit, Somprawin Manprasert and Jaree Pinthong

No 6, PIER Discussion Papers from Puey Ungphakorn Institute for Economic Research

Abstract: This paper builds on a life cycle model of occupational choices and financial frictions to understand the main channel through which demography and inequality influence the economy. Based on household data from Thailand, younger cohorts are likely to be workers and older cohorts are likely to be entrepreneurs due to age-dependent skills and asset accumulation. Under the new normal faced by the Thai economy as well as others, aging population can lower overall total factor productivity and increase inequality. An increase in equilibrium wage due to shortage of labor supply drives mediocre entrepreneurs to become self-employed — a low-income and low-productivity occupation — and worsens total factor productivity and hence inequality. Moreover, a decline in world interest rates associated with global aging population will exacerbate this negative effect. Reducing financial frictions or alleviating a borrowing constraint of talented entrepreneurs can mitigate this effect while extending retirement age will only improve output per capita while total factor productivity and inequality worsen.

Keywords: Demographic Trends; Occupational Choice; Inequality; Life Cycle Models; Financial Frictions (search for similar items in EconPapers)
JEL-codes: D91 E24 J11 J24 O15 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2015-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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