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Population age structure and savings rate impacts on economic growth: Evidence from Australia

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  • Uddin, Gazi A.
  • Alam, Khorshed
  • Gow, Jeff

Abstract

This paper examines the relationship between the dependency ratio, savings rate and real GDP for Australia for the period 1971–2014. Three econometric techniques–dynamic ordinary least squares (DOLS), fully modified ordinary least squares (FMOLS) and the vector error correction model (VECM)–are applied to estimate the relationship. The interaction between the variables in the post-sample period is also forecast using impulse response functions (IRFs) and variance decomposition (VDC) analysis. Each of the three models confirms, to varying degrees, the long-run relationship between the dependency ratio, savings rate and real GDP; however, Granger causality tests do not show any significant short-term relationship among the variables, other than a one-way causality running from the dependency ratio to GDP per capita. The IRFs show the negative response of dependency ratio on GDP per capita, and that this response dies out gradually. In addition, the VDCs forecast the impact of this shock in the dependency ratio on GDP per capita as accounting for, on average, 9% of the total variance in the initial four years and 23% over the next 11 years. The overall result implies that changes in population age structure had a significant impact on real GDP per capita in Australia. However, this advantage of the age structure may disappear in the near future due to the projected rapid increase in the dependency ratio as a result of ageing of the population. This outcome may lead to a slowdown in the GDP growth. Australia needs demographic and immigration policies that involves increasing the skilled working age population to counterbalance the problems associated with an ageing population.

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  • Uddin, Gazi A. & Alam, Khorshed & Gow, Jeff, 2016. "Population age structure and savings rate impacts on economic growth: Evidence from Australia," Economic Analysis and Policy, Elsevier, vol. 52(C), pages 23-33.
    • Handle: RePEc:eee:ecanpo:v:52:y:2016:i:c:p:23-33
    DOI: 10.1016/j.eap.2016.08.002
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    More about this item

    Keywords

    Cointegration; Dependency ratio; Gross domestic product; Impulse response functions; Savings rate; Structural breaks; Unit roots; Variance decomposition;
    All these keywords.

    JEL classification:

    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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