Can labor productivity gains minimize the negative effect of aging on economic growth?

Details

Supervisors

Vandenberghe, Vincent

Faculty

Faculté des sciences économiques, sociales, politiques et de communication

Degree label

Master [120] en sciences économiques, orientation générale

Abstract

This thesis explores empirically using country-level time series whether labor productivity growth can compensate the negative effect of aging on economic growth. I find a strong positive correlation between productivity growth and aging in the most recent period 1985-2014. Cutler et al. (1990) examine the relationship between ageing (whose magnitude is capture by the slower growth rate of the labor force) and labor productivity growth. This paper replicated this analysis with more recent and better quality data, but goes further as it considers the three main components underpinning labor productivity: capital intensity, human capital, and total factor productivity. The results show that capital intensity is strongly and positively correlated with aging in all periods. Moreover, I find that in the most recent period 1985-2014 aging and total factor productivity (TFP) are also strongly correlated. I determine that aging is highly compensated by labor productivity gains in the most recent period 1985-2014. As a result, the aging-driven decrease of employment growth by 1% is compensated by 0,787% increase of labor productivity growth. This thesis is supportive of the idea that countries that are exposed to aging somehow manage to compensate its negative effects on economic growth and living standards by achieving larger labor productivity gains. And the main channels for these gains seem to be more capital intensity and more TFP growth.