Population Aging and Its Impact on Economic Growth -Implications for Korea

Hyun-Hoon Lee, Kwanho Shin and Donghyun Park

Economic Analysis, 2017, vol. 196, 162-188

Abstract: In this paper, we systematically assess the impact of population aging on economic growth using Penn World Table 9.0’s newly available national-accounts growth rates, which is recommended by PWT for comparisons of growth rates across countries. Our empirical specification is an extended partial adjustment model which allows us to estimate the effects of demographic change in both the short run and long run. We use both five and ten year intervals for the period from 1960 to 2014. We find that population aging hampers economic growth in both short run and long run. We also find that elderly participation in the labor force has a positive influence on economic growth, which suggests that the harmful effect of aging can be mitigated by more active participation of the elderly in the labor force. Interestingly, we also find that the future level of population aging, not just the past level, has a detrimental effect on economic growth. Future aging may raise concerns about future growth prospects and thus adversely affect current economic activity. In addition, we project how aging will affect Korea’s future growth prospects. The projected growth rates decline continuously to －2.7％ twenty years from the last year of the sample（ in 2034）, which is even lower than －1.6％, Japan’s fitted growth rate for the most recent year. One possible explanation for why aging has a bigger impact on Korea than Japan is that aging is progressing even more rapidly in Korea than it did in Japan. Korea’s economic future may thus be even gloomier than Japan’s present because its demographic prospects are even worse. Lastly, we offer a number of policy options for Korea to mitigate the pronounced impact of population aging on economic growth. The Korean government has already actively taken a wide range of policy measures to address the aging challenge. Those measures are centered on efforts to boost fertility, but also include support for the elderly. Unfortunately, those measures have not been effective so far, as evidenced by the continued rapid progress of population aging. Going forward, one especially promising area of government intervention, in light of our empirical findings, is raising the participation of women in the workforce through a holistic package of policies that will enable women to better balance work and family. JEL Classification Codes: J10, O10, O40

Keywords: Population aging; demographic transition; economic growth; Korea (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (3)

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