Population Aging and Macroeconomic Performance

• Applicant: Professor Dr. Uwe Sunde
• Subject Area: Economic Policy, Applied Economics ; Economic Theory
• Term: from 2018 to 2022
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 395413683

Population aging is one of the most important economic and social challenges in the twenty-first century. Population aging is not a phenomenon that affects all countries in a similar way, however. Moreover, besides changing the age structure, it has a crucial impact on the skill composition of the working age population.This project addresses three questions that remain open in light of the existing literature: How do population aging and the contemporaneous changes in aggregate human capital affect macroeconomic performance? Can investment in education offset the (potentially negative) effects of population aging? And what are the corresponding prospects of future economic development?In order to address these questions, this project aims at providing a first attempt to systematically quantify the implications of population aging and of the concurrent changes in the skill composition of the workforce for macroeconomic performance within a coherent empirical framework, and to use projections to assess potential future trajectories. In particular, the approach taken in this project is based on three methodological contributions. The first contribution is the development of an empirical framework that allows investigating the interactions between the dynamics in the age composition, in the skill composition of the population, and the implications for macroeconomic performance. The main goal of this framework is to provide a basis for a systematic investigation and decomposition of aging effects through shifts in the demographic composition and changes in the human capital distribution which is missing in the existing literature. The second methodological contribution is the use of the estimation results in combination with available population projections for a comprehensive set of countries to conduct counterfactual simulations of economic performance under alternative scenarios of aging, human capital dynamics, labor force participation and productivity. This will allow addressing the above mentioned research questions about future development prospects and the role of education in offsetting the consequences of population aging. The estimates and simulation results obtained here will be informative about the scope of policies devised to offset the macroeconomic consequences of the changes in the age composition under different scenarios.The third methodological pillar of the project is the development of a computable general equilibrium model in order to validate the empirical results obtained with a reduced-form framework and to gauge the sensitivity of the projection results with respect to equilibrium effects. This will provide the first systematic attempt to investigate the compatibility of results obtained with reduced form estimation and projection methods with the results obtained on the basis of micro-founded general equilibrium models based on heterogeneous populations.

• DFG Programme: Research Grants