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Population, Pensions and Endogenous Economic Growth

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  • Heer, Burkhard
  • Irmen, Andreas

Abstract

We study the effect of a declining labor force on the incentives to engage in labor-saving technical change and ask how this effect is influenced by institutional characteristics of the pension scheme. When labor is scarcer it becomes more expensive and innovation investments that increase labor productivity are more profitable. We incorporate this channel in a new dynamic general equilibrium model with endogenous economic growth and heterogeneous overlapping generations. We calibrate the model for the US economy. First, we establish that the net effect of a decline in population growth on the growth rate of per-capita magnitudes is positive and quantitatively significant. Second, we find that the pension system matters both for the growth performance and for individual welfare. Third, we show that the assessment of pension reform proposals may be different in an endogenous growth framework as opposed to the standard framework with exogenous growth.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7172.

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Date of creation: Feb 2009
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Handle: RePEc:cpr:ceprdp:7172

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Keywords: capital accumulation; demographic transition; growth; pension reform;

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Cited by:
  1. Burkhard Heer & Andreas Irmen, 2008. "Population, Pensions, and Endogenous Economic Growth," Working Papers 0479, University of Heidelberg, Department of Economics, revised Nov 2008.
  2. Ross Guest, 2013. "Population Ageing and Productivity: Implications and Policy Options for New Zealand," Treasury Working Paper Series 13/21, New Zealand Treasury.
  3. Cai Cai Du & Joan Muysken & Olaf Sleijpen, 2011. "Economy wide risk diversification in a three-pillar pension system," DNB Working Papers 286, Netherlands Central Bank, Research Department.

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