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Charting the Economic Life Cycle

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  • Ronald Lee
  • Sang-Hyop Lee
  • Andrew Mason

Abstract

Understanding the economic lifecycle %u2013 how it varies and why %u2013 is important in its own right, but is also critical to understanding how changes in population age structure influence many features of the macroeconomy. Economic behavior over the life cycle can be summarized by the average levels of consumption and labor earnings at each age, as shaped by biology, culture, institutions and individual choice. Here we present estimates of these in detail for the US and Taiwan, showing the roles played by public and familial transfer systems as well as asset accumulation, and present more basic profiles for selected additional countries drawing on studies from a larger project. Average economic dependency occurs when consumption exceeds labor earnings, typically in childhood and old age. A changing population age distribution alters the relative numbers of weighted consumers and producers, as summarized by the support ratio. The %u201Cdemographic dividend%u201D occurs during a sustained period of improving support ratios during the demographic transition, as can be shown using these profiles. The estimated cross-sectional age profiles of labor income have a broadly similar hump shape. However, there are striking contrasts in the timing of earnings over the life cycle. The consumption profiles reveal even more striking contrasts, with a flat age profile of total adult consumption in Taiwan and a steeply rising one in the U.S. We believe these differences reflect the extended family versus the state as the primary locus of transfers to the elderly. Profiles for private consumption are also quite variable, with Indonesia peaking early around age 25, Taiwan being essentially flat, and the US peaking late at around 55. Private expenditures on education show wide variations, with unusually high expenditures in some Asian countries. Because of possible public-private substitutions, it is questionable to assign causality to either for differences in total consumption, but it is hard to avoid noticing that without public spending on Medicare and institutional Medicaid in the U.S., total consumption would decline after 55, whereas with them, it rises strongly. There is only a short period of life during which production exceeds consumption barely more than 30 years in the US, Taiwan, and Thailand. The brevity of this phase contrasts sharply with high life expectancy, approaching 80 years in many countries.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12379.

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Date of creation: Jul 2006
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Publication status: published as Prskawetz, Alexia, David E. Bloom, and Wolfgang Lutz (eds.) Population Aging, Human Capital Accumulation, and Productivity Growth, a supplement to Population and Development Review. 34(Suppl.). Population, 2008.
Handle: RePEc:nbr:nberwo:12379

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Cited by:
  1. Fanny A. Kluge, 2009. "Transfers, consumption and income over the lifecycle in Germany," MPIDR Working Papers WP-2009-014, Max Planck Institute for Demographic Research, Rostock, Germany.
  2. Heinrich Hock & David Weil, 2012. "On the dynamics of the age structure, dependency, and consumption," Journal of Population Economics, Springer, vol. 25(3), pages 1019-1043, July.
  3. Emilio Zagheni, 2011. "The Leverage of Demographic Dynamics on Carbon Dioxide Emissions: Does Age Structure Matter?," Demography, Springer, vol. 48(1), pages 371-399, February.
  4. Liviano Solís, Daniel & Arauzo Carod, Josep Maria, 2013. "Spatial Exploration of Age Distribution in Catalan Municipalities," Working Papers 2072/220222, Universitat Rovira i Virgili, Department of Economics.
  5. Salas, J.M. Ian S. & Abrigo, Michael Ralph M. & Racelis, Rachel H., 2012. "Philippines 2007 National Transfer Accounts: Consumption, Labor Income, and Lifecycle Deficit by Income Group," Discussion Papers DP 2012-32, Philippine Institute for Development Studies.
  6. Salas, J.M. Ian S. & Abrigo, Michael Ralph M. & Racelis, Rachel H., 2012. "Philippines 2007 National Transfer Accounts: Financing Consumption and Lifecycle Deficit by Income Group," Discussion Papers DP 2012-33, Philippine Institute for Development Studies.
  7. Kosei Fukuda, 2007. "Age-period-cohort decomposition of social security taxes and benefits in the USA and Japan," International Economics and Economic Policy, Springer, vol. 4(3), pages 227-240, November.
  8. Salas, J.M. Ian S. & Abrigo, Michael Ralph M. & Racelis, Rachel H., 2012. "Philippines 2007 National Transfer Accounts: Consumption, Income, and Intergenerational Reallocation of Resources," Discussion Papers DP 2012-29, Philippine Institute for Development Studies.
  9. Peeters, Marga, 2012. "Asymmetric demographic pressure in South-Mediterranean versus North-Mediterranean economies and its impact on international gross capital flows," MPRA Paper 39635, University Library of Munich, Germany.
  10. David E. Bloom & David Canning & Günther Fink & Jocelyn Finlay, 2007. "Realizing the Demographic Dividend: Is Africa any different?," PGDA Working Papers 2307, Program on the Global Demography of Aging.
  11. Marga Peeters & Loek Groot, 2012. "A Global View On Demographic Pressure And Labour Market Participation," Journal of Global Economy, Research Centre for Social Sciences,Mumbai, India, vol. 8(2), pages 165-194, June.
  12. Ronald Lee & Andrew Mason, 2010. "Some macroeconomic aspects of global population aging," Demography, Springer, vol. 47(1), pages S151-S172, March.
  13. Zamac, Jovan, 2007. "Pension design when fertility fluctuates: The role of education and capital mobility," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 619-639, April.

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