Demographic Change, Human Capital and Welfare

56 Pages Posted: 27 Jan 2010

See all articles by Alexander Ludwig

Alexander Ludwig

Goethe University Frankfurt

Thomas Schelkle

London School of Economics & Political Science (LSE)

Edgar Vogel

Deutsche Bundesbank; Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA)

Date Written: January 2, 2010

Abstract

This paper employs a large scale overlapping generations (OLG) model with endogenous human capital formation using a Ben-Porath (1967) technology to evaluate the quantitative role of human capital adjustments for the economic consequences of demographic change. We find that endogenous human capital formation is a quantitatively important adjustment mechanism which substantially mitigates the macroeconomic impact of population aging. On the aggregate level, the predicted decrease of the rate of return to physical capital is only one third of the predicted decrease in a standard model with a fixed human capital profile. In terms of welfare, while young agents with little assets gain up to 0.8% in consumption from increasing wages in both models, welfare losses from decreasing returns of older and asset rich households are substantial. But importantly, these losses are about 50-70% higher in the model without endogenous human capital formation. Ignoring this adjustment channel thus leads to quantitatively important biases of the welfare assessment of demographic change. We also document that not reforming the social security system but letting contribution rates increase will largely offset any positive welfare effects for future generations.

Keywords: population aging, human capital, rate of return, distribution of welfare

JEL Classification: C68, E17, E25, J11, J24

Suggested Citation

Ludwig, Alexander and Schelkle, Thomas and Vogel, Edgar, Demographic Change, Human Capital and Welfare (January 2, 2010). MEA Discussion Paper No. 196-2010, Available at SSRN: https://ssrn.com/abstract=1538748 or http://dx.doi.org/10.2139/ssrn.1538748

Alexander Ludwig

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Thomas Schelkle

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Edgar Vogel (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Strasse 14
Frankfurt am Main, 60431
Germany

HOME PAGE: http://www.bundesbank.de

Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA) ( email )

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Munich, 80799
Germany

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