Demographic change, human capital and welfare

Ludwig, Alexander ; Schelkle, Thomas ; Vogel, Edgar

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URN: urn:nbn:de:bsz:180-madoc-26136
Document Type: Working paper
Year of publication: 2010
The title of a journal, publication series: None
Publication language: English
Institution: School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series: Veröffentlichungen des MEA (Mannheim Research Institute For the Economics of Aging) > MEA Discussion Papers
Subject: 330 Economics
Classification: JEL: J24 J11 E25 E17 C68 ,
Subject headings (SWD): Überalterung , Humankapital , Mehrgenerationenmodell , Wohlfahrtstheorie , Soziales System
Keywords (English): population aging , human capital , rate of return , distribution of welfare
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.
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