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Demographic change, human capital and welfare

Ludwig, Alexander, Schelkle, Thomas and Voge, Edgar (2012) Demographic change, human capital and welfare. Review of Economic Dynamics, 15 (1). pp. 94-107. ISSN 1096-6099

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Abstract

Projected demographic changes in the U.S. will reduce the share of the working-age population. Analyses based on standard OLG models predict that these changes will increase the capital-labor ratio. Hence, rates of return to capital decrease and wages increase, which has adverse welfare consequences for current cohorts who will be retired when the rate of return is low. This paper argues that adding endogenous human capital accumulation to the standard model dampens these forces. We find that this adjustment channel is quantitatively important. The standard model with exogenous human capital predicts welfare losses up to 12.5 (5.6 ) of lifetime consumption, when contribution (replacement) rates to the pension system are kept constant. These numbers reduce to approximately 8.7 (4.4 ) when human capital can endogenously adjust. © 2011 Elsevier Inc. All rights reserved.

Item Type: Article
Official URL: http://www.journals.elsevier.com/review-of-economi...
Additional Information: © 2012 Elsevier
Library of Congress subject classification: H Social Sciences > HV Social pathology. Social and public welfare. Criminology
Sets: Departments > Economics
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 13 Oct 2011 15:20
URL: http://eprints.lse.ac.uk/38785/

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