Economic effects of demographic changes

Abstract

This thesis examines several economic implications of demographic changes. Chapter 2 documents a relation between the age structure of economies and their real exchange rate. The relation varies with the level of development. Among developed countries a 10 percentage point higher ratio of old people to the working age population is associated with a 12-15 percent higher price level. In middle income developing economies, a 10 percentage point increase in the ratio of children to the working age population is related to a 4 percent increase in the price level. A simple model attributes the findings to the effect of the age groups on the demand for nontradables. Its calibration indicates that this explanation can account for a substantial part of the observed effect of the elderly. It is also consistent with the much smaller impact of children. The fact that the significance of the elderly is limited to developed countries further supports the argument. The generational conflict hypothesis argues that the elderly might use their political power to reduce public resources for children. It is usually tested by exploiting the localized nature of school funding in the US. Chapter 3 takes a different approach using cross-country data on family benefits. I find a positive relation at the national level between the generosity of these benefits and the share of the elderly in the electorate. The findings can add to the debate on local school funding. I also suggest that the effect of the elderly may reflect the larger proportion of women among them. Chapter 4 shows that individuals with no post-secondary education are less supportive of public R&D spending. This points to possible political economy causes of technological change. A high proportion of educated voters may accelerate such change by expanding public R&D outlays. Thus an increased supply of skilled workers could raise the relative demand for them. The difference in support for R&D spending suggests that it favors skilled workers either by directly employing them or indirectly by generating skill-biased technological change.