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Capital- and Labor-Saving Technical Change in an Aging Economy

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  • Andreas Irmen

    ()
    (CREA, University of Luxembourg)

Abstract

Does population aging and the associated increase in the old-age dependency ratio affect economic growth ? The answer is given in a novel analytical framework that allows for population aging to affect endogenous capital- and labor-saving technical change. The short-run analysis reveals that population aging induces more labor- and less capital-saving technical change as it increases the relative scarcity of labor with respect to capital. Due to external contemporaneous knowledge spill-overs across innovating firms induced technical change has a first-order effect on current aggregate income. In the long-run capitalsaving technical progress vanishes, and the economy’s growth rate reflects only labor-saving technical change. However, the mere possibility of capital-saving technical change is shown to imply that the economy’s steady-state growth rate becomes independent of its age structure: neither a higher life-expectancy nor a decline in fertility affects economic growth in the long run.

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File URL: http://wwwfr.uni.lu/content/download/66428/841100/file/2013-27%20-%20Capital-%20and%20Labor-Saving%20Technical%20Change%20in%20an%20Aging%20Economy.pdf
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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 13-27.

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Date of creation: 2013
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Handle: RePEc:luc:wpaper:13-27

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Keywords: Demographic Transition; Capital Accumulation; Direction of Technical Change;

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