On the Consequences of Demographic Change for Rates of Returns to Capital, and the Distribution of Wealth and Welfare
This paper employs a multi-country large scale Overlapping Generations model with uninsurable labor productivity and mortality risk to quantify the impact of the demographic transition towards an older population in industrialized countries on world-wide rates of return, international capital flows and the distribution of wealth and welfare in the OECD. We find that for the U.S. as an open economy, rates of return are predicted to decline by 86 basis points between 2005 and 2080 and wages increase by about 4.1%. If the U.S. were a closed economy, rates of return would decline and wages increase by less. This is due to the fact that other regions in the OECD will age even more rapidly; therefore the U.S. is "importing" the more severe demographic transition from the rest of the OECD in the form of larger factor price changes. In terms of welfare, our model suggests that young agents with little assets and currently low labor productivity gain, up to 1% in consumption, from higher wages associated with population aging. Older, asset-rich households tend to lose, because of the predicted decline in real returns to capital.
We thank participants of seminars at the LSE, Ente Einaudi, Koc, MEA, the 2005 Cleveland
FED International Macroeconomics conference, the 2006 Carnegie Rochester conference,
the 2006 SED Meetings and the 12th Dubrovnik Economic Conference for many useful comments.
We are especially indebted to our discussant Ayse Imrohoroglu for many helpful suggestions
and comments. The authors can be reached at firstname.lastname@example.org
and email@example.com. This paper was prepared for the Spring 2006
Carnegie-Rochester Conference on Public Policy.
Krueger, Dirk & Ludwig, Alexander, 2007. "On the consequences of demographic change for rates of returns to capital, and the distribution of wealth and welfare," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 49-87, January. citation courtesy of