The Dependency Ratios Of Oecd Countries Economics Essay
After the post war, “baby boom” generation has been into the old-age group, OECD ever reported that the dependency ratios (ratio of dependants to the working age population) in 2040 is twice time as the ratio in 1980 in OECD countries. then the increase in longevity and decrease in fertility which causes the number of older people growing. However, “Before the twentieth century population ageing had never happened on an appreciable scale, so economists had little reason to consider its hypothetical economic consequences”, William A. Jackson pointed, “When widespread population ageing first emerged in the early twentieth century, economists and other academic commentators scarcely noticed it”(page14, 1998). So how the population ageing impact the economy? The overlapping generation model (OLG) was firstly presented by Auerbach and Kotlikoff (1987).
Carry young (2002) pointed that based on if the overlapping generation structure of population is considered, this model can be classified two groups. Primarily, the group embraces the analysis of Cutler er al (1990) which depends on a modified growth model in closed economy and the assessment cross-country model of Turner el al (1998). Secondly, the group contains the calibrated models which separate the birth and death population into different groups. And now it has been a standard tool which to be used by economists to analyse the impact of demographic change. However Miles (1999)’s OLG model is a better example to apply to the UK and Europe (Garry Young (2002)). Miles’s OLG model has some assumptions, firstly it assumed people can be alive 60 years period time; secondly Miles considered promoting technical can improve productivities and change productivities over individual’s life time. In addition, people can maximise to arrange their consumption of goods and leisure by a utility function and bequests are not considered. Moreover, the Cobb-Douglas production function has given wages and interest rate, and the real interest rate is endogenous in closed economy. Finally the government have set the official retirement age. Carry Young (2002) used Miles’s OLG model to assess the impact of the demographic alteration. Carry Young (2002) thought the rate of saving and the accumulation of capital which are the two important factors in the long run economy growth. He separated the people into three generation as he assessed his points in this model: the baby boom, the greater longevity and the lower fertility. He found “a baby has an adverse effect on the baby boom generation” because when the people are working age, then the wage can shrink, but the retirement age can decrease return of interest. Moreover, the greater longevity has adverse effect on individual consumption behaviour because people have to spread their consumption demand over more years. Finally, the lower fertility can change the amount of the people, but it cannot significantly affect the individual consumption.
Maxime Fougère and Marcel Mérette(1998-2003) used the OLG model to exam the impacts of population ageing in OECD countries, which based on Hviding and Mérette’s (1998) OLG model which was used to apply to Canada, France, Italy, Japan, Sweden, the United Kingdom and the United states. Hviding and Mérette’s (1998) OLG model which is also based on life-cycle theory of saving behaviour, it assumed the economy is closed, bequest is considered, and labour force is exogenous, moreover, the fertility rate is assumed to be unchanged in long term (but actually the fertility rate is reduction at the beginning of 1954). In this model it tested the macroeconomic implication of ageing on wage-income tax rate, national saving rate, real return on capital and real output per capita in the seven OECD countries. The conclusion of Hviding and Mérette’s (1998) OLG model with exogenous growth, population ageing can lead to increase in wage income taxes in the future, especially the tax rate will reach to the top between 2034 and 2050; secondly ageing decreases in private and national saving, the reason is in exogenous growth the labour-augmenting technical progress is also exogenous which are effected by population structure and exogenous rate of technical progress, then as the labour force and requirement capital shrink which can reduce the private saving; eventually, the real return on capital and real output per capita decrease but conversely before-tax real wages can grow. However in Maxime Fougère and Marcel Mérette(1998-2003)’s OLG model, they added endogenous growth which includes human capital, and others parameters are same. It also tested the four same factors, but the results are different from exogenous growth OLG model. Maxime Fougère and Marcel Mérette summarised ageing population can decrease the real return on capital and increase in the present value of future income which bring about portfolio redistribution; furthermore, the growth of wage-income tax rates, the diminish of national saving rates and the real return on capital are all smaller than the model with exogenous growth. Then the results of the modified model implied ageing population can increase economy growth via more investment in human capital; moreover, the loss of real output by diminishing of national saving does not always effectuate, because reduction of physical capital can be replaced by more investment in human capital, which also can improve economy development; thirdly tax rate in endogenous growth raises which is different with the results in exogenous growth. However the two OLG models both have some limitations, Maxime Fougère and Marcel Mérette clarified, firstly the assumption of closed economy is not reliable in the real world; secondly, heath care and education were not as factors to include in the two models, but the two elements may effect on change of tax rate; finally variation of protected assess shocks by institution for elderly population did not be considered in model, but it also can effect on government revenue and tax rate in future.
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