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On the Consequences of Demographic Change for Rates of Returns to Capital, and the Distribution of Wealth and Welfare

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  • Dirk Krueger
  • Alexander Ludwig

Abstract

This paper employs a multi-country large scale Overlapping Generations model with uninsurable labor productivity and mortality risk to quantify the impact of the demographic transition towards an older population in industrialized countries on world-wide rates of return, international capital flows and the distribution of wealth and welfare in the OECD. We find that for the U.S. as an open economy, rates of return are predicted to decline by 86 basis points between 2005 and 2080 and wages increase by about 4.1%. If the U.S. were a closed economy, rates of return would decline and wages increase by less. This is due to the fact that other regions in the OECD will age even more rapidly; therefore the U.S. is "importing" the more severe demographic transition from the rest of the OECD in the form of larger factor price changes. In terms of welfare, our model suggests that young agents with little assets and currently low labor productivity gain, up to 1% in consumption, from higher wages associated with population aging. Older, asset-rich households tend to lose, because of the predicted decline in real returns to capital.

Suggested Citation

  • Dirk Krueger & Alexander Ludwig, 2006. "On the Consequences of Demographic Change for Rates of Returns to Capital, and the Distribution of Wealth and Welfare," NBER Working Papers 12453, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12453
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    More about this item

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

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