Age structure effects on theeconomy

Thomas LindhResearch Director

and Professor in Economics

Why is age structure one of thedeterminants of the

macroeconomy?1. Biological and economic reasons imply

that human behavior and resourcesvary over the life cycle

2. Age structure change thereforecorrelate with macroeconomic change.

3. Useful because such changes can beindependently predicted for manyyears.

Age distribution of population

SavingsHousing

Stocks Consumption of goodsDemand for services

Children LaborEnterprise

Public expend.Tax base

Interest rates

Imports Exports Investment Wealth Industries Regional development

GDP growth Budget balance

Age structure effects on the economy

Wages Inflation Exchange rates Relative prices

Current account

Age profiles ISource: Malmberg & Lindh, Swedish estimates

• National savings– 50-64 pos– 0-14,75+ neg

• Government budget– 15-29,50-64 pos– 0-14, 65+ neg

• GDP growth– 15-64 pos– 0-14, 65+ neg

G r o w t h

-1 .5

-1

-0 .5

0

0 .5

1

1 .5

0 – 1 4 1 5 -2 9 3 0 -4 9 5 0 -6 4 6 5 -7 4 7 5 +

B u d g e t d e f ic it

-2

-1 .5

-1

-0 .5

0

0 .5

1

1 .5

2

0 – 1 4 1 5 -2 9 3 0 -4 9 5 0 -6 4 6 5 -7 4 7 5 +

N a t io n a l s a v in g r a t e

-2

-1

0

1

2

3

0 – 1 4 1 5 -2 9 3 0 -4 9 5 0 -6 4 6 5 -7 4 7 5 +

Age profiles IISource: Malmberg & Lindh, Swedish estimates

• Investment– 30-74 pos– 0-14, 75+ neg

• Current account– 50-64, 75+ pos– 65-74 neg

• Inflation– 65-74 pos– 50-64,75+ neg

In f la t io n

-3

-2

-1

0

1

2

3

4

5

0 – 1 4 1 5 -2 9 3 0 -4 9 5 0 -6 4 6 5 -7 4 7 5 +

C u r r e n t a c c o u n t

- 2

- 1 .5

- 1

- 0 .5

0

0 .5

1

1 .5

2

0 – 1 4 1 5 - 2 9 3 0 - 4 9 5 0 - 6 4 6 5 - 7 4 7 5 +

I n v e s t m e n t

- 4

- 3

- 2

- 1

0

1

2

3

0 – 1 4 1 5 - 2 9 3 0 - 4 9 5 0 - 6 4 6 5 - 7 4 7 5 +

OECD evidence

• 2007, Lindh & Malmberg “Age structure effectson investment, saving and trade”. Chapter 7 in:Population aging, intergenerational transfersand the macroeconomy, Clark et al. (eds).Edward Elgar Publishing, 163-191.

• 1999, Lindh & Malmberg “Age structure effectsand growth in the OECD, 1950-90” Journal ofPopulation Economics, 12(3), 431-449.

• 1998, Lindh & Malmberg “Age structure andinflation - A Wicksellian interpretation of theOECD data” Journal of Economic Behaviorand Organization, July, 36(1), 19-37.

NIER forecast2007-2009 (Jan -08)

NIER forecast 2006-2009

(Oct -07)

NIER forecasts 2007-2010 (June 08)

0%

1%

2%

3%

4%

5%

1995 2000 2005 2010 2015 2020

GDP growth forecasts Sweden

Global panel modelforecast using data up to1998

Actual GDP growthSwedish timeseries forecastfrom 2003

100

1000

10000

100000

1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

maddison*pwt backcast +95% -95%

Backcast of global GDP per capita modelSweden 1820-1950

Forthcoming, De laCroix et al. Journal ofMacroeconomics

Model in 2007 Lindh & Malmberg, Demographically based globalincome forecasts up to the year 2050. International Journal ofForecasting 23(4), 553-567. http://dx.doi.org/10.1016/j.ijforecast.2007.07.005

What about Germany?

• Report forthcoming financed byBertelsmann Stiftung

• Age structure effects on the Germaneconomy, with an internationalcomparison. Lindh & Malmberg, Institutefor Futures Studies

• Results still preliminary…• …but basically similar

German age structureEast West

1 000 000 800 000 600 000 400 000 200 000 0 200 000 400 000 600 000 800 000 1 000 000

Unter 5

5 - 10

10 - 15

15 - 20

20 - 25

25 - 30

30 - 35

35 - 40

40 - 45

45 - 50

50 - 55

55 - 60

60 - 65

65 - 70

70 - 75

75 - 80

80 - 85

85 - 90

90 und älter oder 90-95

95+

males females

3 000 000 2 000 000 1 000 000 0 1 000 000 2 000 000 3 000 000

Unter 5

5 - 10

10 - 15

15 - 20

20 - 25

25 - 30

30 - 35

35 - 40

40 - 45

45 - 50

50 - 55

55 - 60

60 - 65

65 - 70

70 - 75

75 - 80

80 - 85

85 - 90

90 und älter oder 90-95

95+

males females

800 000 600 000 400 000 200 000 0 200 000 400 000 600 000 800 000

Unter 5

5 - 10

10 - 15

15 - 20

20 - 25

25 - 30

30 - 35

35 - 40

40 - 45

45 - 50

50 - 55

55 - 60

60 - 65

65 - 70

70 - 75

75 - 80

80 - 85

85 - 90

90 und älter oder 90-95

95+

males females

4 000 000 3 000 000 2 000 000 1 000 000 0 1 000 000 2 000 000 3 000 000 4 000 000

Unter 5

5 - 10

10 - 15

15 - 20

20 - 25

25 - 30

30 - 35

35 - 40

40 - 45

45 - 50

50 - 55

55 - 60

60 - 65

65 - 70

70 - 75

75 - 80

80 - 85

85 - 90

90 und älter oder 90-95

95+

males females

1950

2000

Unification and age shares

S014 S1529

1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 20100.144

0.160

0.176

0.192

0.208

0.224

0.240

0.256

S3049 S5064 S65W

1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 20100.075

0.100

0.125

0.150

0.175

0.200

0.225

0.250

0.275

0.300

Children

Youngadults

Retirees

Middleaged

Matureadults

GDP/cap growth forecasts out-of-sample for Germany

1987:01

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005-0.12

-0.08

-0.04

0.00

0.04

0.08

0.12

1999:01

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005-0.12

-0.08

-0.04

0.00

0.04

0.08

0.12

1960-2004estimatedagepattern

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

15-29 30-49 50-64 65+

Long term forecast of GermanGDP/capita up to 2050

1950 1958 1966 1974 1982 1990 1998 2006 2014 2022 2030 2038 2046-0.12

-0.08

-0.04

0.00

0.04

0.08

0.12

Age share variation

S3049 S5064 S65W

2000 2004 2008 2012 2016 2020 2024 2028 2032 2036 2040 2044 20480.16

0.18

0.20

0.22

0.24

0.26

0.28

0.30

0.32

Middle agedincreasing

Demographic part of growth in East and Westaccording to demographic projections

0

0.005

0.01

0.015

0.02

0.025

0.03

0.035

0.04

0.045

0.05

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

2044

2046

2048

2050

West G growth East G growth

Disregard the level of the forecasts, the interceptcannot be separately estimated

Inflation, Consumer Price Index

-1

-0.5

0

0.5

1

1.5

2

age 0_14 age 15_29 age 30_49 age 50_64 age 65_74 age 75+

Estimate Pooled

GDP per capita growth

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

age 0_14 age 15_29 age 30_49 age 50_64 age 65_74 age 75+

Country effects Pooled

EU15, China, USA,Japan and India

Age profile estimatesfrom panel data

WDI and WPP

Current Account Balance

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

age 0_14 age 15_29 age 30_49 age 50_64 age 65_74 age 75+

Coutry effects Pooled

Gross domestic savings

-4

-3.5

-3

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

age 0_14 age 15_29 age 30_49 age 50_64 age 65_74 age 75+

Country effects Pooled

Gross capital formation

-3

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

age 0_14 age 15_29 age 30_49 age 50_64 age 65_74 age 75+

Coutry effects Pooled

EU15, China, USA,Japan and India

Age profile estimatesfrom panel data

WDI and WPP

Favourite quote

”Understanding how to adjust economic policywith respect to future demographic changewill be a crucial question for policy makers inthe aging industrial countries”

(Alvin Hansen AER 1939

presidential address at AEA).

Is Doomsday here?

• Forecasts are contingent on assumptions– Correlations remaining the same

• Change over time although slowly in this case

– Demographic projections• Although fairly accurate 10-20 years uncertainty then

increases fast

– Nobody reacting to the forecast• But surely people are reacting and starting to adapt• Only remember the Hansen quote: to react adequately we

have to understand the mechanisms better• There are many margins to adapt on that work at widely

different horizons

How to adapt and when?

• Work longer• Start to work earlier• Work harder• Educate and work

better• Immigration• Save capital• Population growth

• Maybe 5-15 years• Immediate (short edu)• Immediate (but hard)• 10-40 years (cost)

• 2-30 years (integration)• Global long term horizon?• 25-60 years (massive

investment costs)

Adaptations interact, investment and benefits at different times

Global context

• Timing differs considerably within EU• Global competition may thwart some

adaptations and favour others• Aging tends to make us internationally

more dependent both on migration andcapital markets