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Global Agingand Global Economics Issues, some answers, and many more research questions

Axel Börsch-SupanMannheim Institute for the Economics of Aging (MEA)and NBER

RAND Summer Institute 2004

for you !

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1. Fundamentals: Demography (and open questions on links to economics)

2. The Wealth of Nations:Labor Market Issues (Macro/Micro)

3. Product Markets: Sectoral Change, Trade and Infrastructure

4. The Strategic Role of Capital Markets: Asset Meltdown, Portfolio Effects, Globalization and Diversification

Contents

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Open Questions in Economic Demography

• Deterministic and stochastic projections:

How reliable are they?

• Is demography exogenous? Do we understand

causality? Economic incentives to fertility and

migration

1. Demography

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Economy: Y = A * F(L, K)

Individual: Y/N = A * f(L/N, K/L)

Globalization: GDP vs. GNP

The Wealth of Nations

2. Labor Market

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Abbildung 1: Erwerbstätige in Deutschland, 2000-2050 [in Millionen]

2022242628303234363840

20002005201020152020202520302035204020452050

Szenario E3

Szenario E2

Szenario E1

Quelle: Berechnungen des Autors auf Basis der Bevölkerungsprognose B2

Labor supply in Germany

Germany will face ashrinking work force -shrinking economy?

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Abbildung 2: Stützquote (Erwerbstätige pro Erwachsene), 2000-2050 [in %]

35,0%

40,0%

45,0%

50,0%

55,0%

60,0%

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

Szenario E3

Szenario E2

Szenario E1

Quelle: Berechnungen des Autors auf Basis der Bevölkerungsprognose B2.

-15% in 25 years

-0.45 ppt per annum

⇒ Support ratio(Employment/Consumer)

⇒ German GDP per capita(net of exogenous GDP growth)

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Y = A * F(L, K)

Response of L to aging (retirement age,entrance age, female LFP, unemployment)

Response of A to aging (age profile ofproductivity, health, capital intensity)

Research issues:

2. Labor Market

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Abbildung 4: Alters- und senioritätsspezifische Verdienste

a) Vertriebsmitarbeiter b) Büroangestellte

0

5

10

15

20

25

30

20 24 28 32 36 40 44 48 52 56 60 64 68Alter

Ver

dien

st [1

000$

pro

Jah

r]

20

30

40

0

10

20

30

40

50

60

20 24 28 32 36 40 44 48 52 56 60 64 68

Alter

Ver

dien

st [1

000$

pro

Jah

r]

20

30

35

40

4550

55

60

Quelle: Kotlikoff und Wise (1989), ), Employee Retirement and a Firm’s Pension Plan, in D.A. Wise, ed., The Eco-nomics of Aging, Chicago: University of Chicago Press, 279-334.

Age-Specific Labor Productivity?

Sales force Clerical workers (on piece rate) (on salary)

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Abbildung 9: Relative Arbeitsproduktivität von Vertriebspersonal und Büroangestellten

93,0%

94,0%

95,0%

96,0%

97,0%

98,0%

99,0%

100,0%

101,0%

2000 2010 2020 2030 2040 2050

Salesmen

Salarymen

Quelle: Berechnungen des Autors

Abbildung 4: Alters- und senioritätsspezifische Verdienste

a) Vertriebsmitarbeiter b) Büroangestellte

0

5

10

15

20

25

30

20 24 28 32 36 40 44 48 52 56 60 64 68

Alter

Ver

dien

st [1

000$

pro

Jah

r]

20

30

40

0

10

20

30

40

50

60

20 24 28 32 36 40 44 48 52 56 60 64 68

Alter

Ver

dien

st [1

000$

pro

Jah

r]

20

30

35

40

45

50

55

60

Quelle: Kotlikoff und Wise (1989), ), Employee Retirement and a Firm’s Pension Plan, in D.A. Wise, ed., The Eco-nomics of Aging, Chicago: University of Chicago Press, 279-334.

⇒ Effect on aggregate labor productivity

No effectvs.

0.15 ppt p.a.(10% of growth)

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Large structural changes in the productmarket require more sectoral mobility in the labor market

A European (?) issue:

3. Product Markets

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Consumption demand shiftsAbbildung 5: Altersspezifische Konsumausgaben [Gütergruppen in Prozent]

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

8 0

9 0

1 0 0

unte r 3 5 3 5 -4 5 4 5 -5 5 5 5 -6 5 6 5 -7 0 7 0 undm e hr

P e rsö nliche A us ta ttung u.ä . [% ]

B i ld ung und U nte rha ltung [% ]

V e rke hr- undN a chrichte nüb e rm ittlung [% ]

G e sund he its - undK ö rp e rp fle g e [% ]

Ü b rig e G üte r f.H a usha lts führung [% ]

E le k trizi tä t, G a s , B re nns to ffe[% ]

W o hnung sm ie te n u.ä . [% ]

K le id ung , S chuhe [% ]

N a hrung sm itte l, G e trä nke ,Ta b a kw a re n [% ]

Quelle: Statistisches Bundesamt, Fachserie 15, Heft 5, EVS 1993.

Mobility demand

shrinks to 50% ...

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Abbildung 5: Altersspezifische Konsumausgaben [Gütergruppen in Prozent]

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

8 0

9 0

1 0 0

unte r 3 5 3 5 -4 5 4 5 -5 5 5 5 -6 5 6 5 -7 0 7 0 undm e hr

P e rsö nliche A us ta ttung u.ä . [% ]

B i ld ung und U nte rha ltung [% ]

V e rke hr- undN a chrichte nüb e rm ittlung [% ]

G e sund he its - undK ö rp e rp fle g e [% ]

Ü b rig e G üte r f.H a usha lts führung [% ]

E le k trizi tä t, G a s , B re nns to ffe[% ]

W o hnung sm ie te n u.ä . [% ]

K le id ung , S chuhe [% ]

N a hrung sm itte l, G e trä nke ,Ta b a kw a re n [% ]

Quelle: Statistisches Bundesamt, Fachserie 15, Heft 5, EVS 1993.

Consumption demand shifts

… but demand forhealthcare doublesover the life course

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⇒ Large sectoral labor mobility!

Abbildung 6: Zu- und Abnahme der Beschäftigung nach Gütergruppensektor

-6,0%

-4,0%

-2,0%

0,0%

2,0%

4,0%

6,0%

8,0%

2010 2020 2030 2040 2050

Ges undheits - und K örperpflege [% ]

P ers önlic he A us tattung u.ä. [% ]

E lek triz ität, G as , B renns toffe [% ]

W ohnungs m ieten u.ä. [% ]

Nahrungs m ittel, G etränk e,Tabak waren [% ]

Übrige G üter f. Haus halts führung[% ]

K leidung, S c huhe [% ]

B ildung und Unterhaltung [% ]

V erk ehr- undNac hric htenüberm itt lung [% ]

Quelle: Berechnungen des Autors auf Basis der Bevölkerungsprognose B2 (vgl. Abbildung 1), der Ausgaben-

anteile aus Abbildung 5, sowie des Statistischen Jahrbuchs „Umsätze pro Beschäftigte“ nach Sektoren.

Every sixth job will be moved to a different sector

Abbildung 5: Altersspezifische Konsumausgaben [Gütergruppen in Prozent]

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

8 0

9 0

1 0 0

unte r 3 5 3 5 -4 5 4 5 -5 5 5 5 -6 5 6 5 -7 0 7 0 undm e hr

P e rsö nliche A us ta ttung u.ä . [% ]

B i ld ung und Unte rha ltung [% ]

V e rke hr- undNa chrichte nüb e rm ittlung [% ]

G e sund he its - undK ö rp e rp fle g e [% ]

Üb rig e G üte r f.Ha usha lts führung [% ]

E le k trizitä t, G a s , B re nns to ffe[% ]

W o hnung sm ie te n u.ä . [% ]

K le id ung , S chuhe [% ]

Na hrung sm itte l, G e trä nke ,Ta b a kwa re n [% ]

Quelle: Statistisches Bundesamt, Fachserie 15, Heft 5, EVS 1993.

bzw. =

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-Substitution of scarce and costly labor

-Intertemporal resource shifting

-International diversification

But:Asset meltdown? Scarcity of capital supply?

Strategic role of capital marketsin the course of global aging:

4. Capital Markets

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„Asset Meltdown“ Hypothesis

0%

2%

4%

6%

8%

10%

12%

14%

16%

20 25 30 35 40 45 50 55 60 65 70 75 80 85

Altersgruppe

Spar

quot

e

190919141919192419291934193919441949195419591964

Saving rate byage and cohort

11%

5%

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-20,0%

0,0%

20,0%

40,0%

60,0%

80,0%

100,0%

120,0%

140,0%

25 30 35 40 45 50 55 60 65 70 75

GermanyItalyFranceNL

Saving rates byage and cohort(relative to age 40)

„Asset Meltdown“ Hypothesis

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• How responsive are age-saving profiles to public policy (tax privileges, pensions)?

• Realistic general equilibrium models of capital accumulation

Quite sophisticated, but:• Risk (life span, earnings, returns)• Portfolio effects• Capital market frictions (home bias, FDI)• Behavioral reaction to pension reform

Research issues:

4. Capital Markets

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Saving rate

8%

5%

⇒ saving rate declines, but neither abruptly nor dramatically

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Capital stock: Asset Meltdown?

Capital stock as multipleof GDP

Small, only relative,and diversifiable!

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Rate of return: Asset Meltdown?

OLG models indicate so far:

Demographically induceddecline of rate of return is non-negligible, but far from a capital market breakdown

7,8% (4,8%)

6,8%(3,8%)

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Safe versus risky assets?

0%

1%

2%

3%

4%

5%

6%

7%

8%

2000 2010 2020 2030 2040 2050

Aktien g=2,0%Aktien g=1,5%Aktien g=1,0%Equity Pr. g=1,0%Equity Pr. g=1,5%Equity Pr. g=2,0%Geld g=2,0%Geld g=1,5%Geld g=1,0%

Risky: equity

Equity premium

Safe: savings accounts

Implications of differential aging

0,5

0,6

0,7

2000 2010 2020 2030 2040 2050

OECD 13USA EU 14GermanyJapan

Note: Share persons of working age in total population

SupportRatio

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Induced international capital flows

0,5

0,6

0,7

2000 2010 2020 2030 2040 2050

OECD 13USA EU 14GermanyJapan

Note: Share persons of working age in total population

Support ratio

⇒ Net capital flows

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

2000 2010 2020 2030 2040 2050

year

net

capi

tal e

xpor

ts/

tota

l cap

ital f

low

s USAGermanyOECD 12JapanEU 14

Multi-country OLG model

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• Capital productivity important part of TFP

• Strategic role of capital markets makes corporate governance more important

• Feedback effects of pension reform

Final issue: Corporate governance

4. Capital Markets

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Where to set priorities?• Aging and productivity (need firm data!)

• Behavioral responses to pension reform: retirement age, saving (need international data! Time-honored questions with limited answers)

• Macroeconomic effects of risk management

• Global capital flows (home bias, frictions)

Resumé