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Population, Pensions, And Endogenous Economic Growth

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  • Burkhard Heer

    ()
    (University of Augsburg)

  • Andreas Irmen

    ()
    (CREA, Université de Luxembourg)

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 and obtain the following results. First, the effect of a decline in population growth on labor productivity growth is positive and quantitatively significant. In our benchmark, it is predicted to increase from an average annual growth rate of 1.74% over 1990-2000 to 2.41% in 2100. Second, institutional characteristics of the pension system matter both for the growth performance and for individual welfare. Third, the assessment of pension reform proposals may depend on whether economic growth is endogenous or exogenous.

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Bibliographic Info

Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 13-17.

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Date of creation: 2013
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Handle: RePEc:luc:wpaper:13-17

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Keywords: Growth; Demographic Transition; Capital Accumulation; Pension Reform;

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Cited by:
  1. Burkhard Heer & Andreas Irmen, 2013. "Population, Pensions, And Endogenous Economic Growth," CREA Discussion Paper Series 13-17, Center for Research in Economic Analysis, University of Luxembourg.
  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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