A method for socially evaluating the effects of long-run demographic paths on living standards

Abstract

AbstractBACKGROUNDThe paper is motivated by the need for improved social evaluation of prospective demographic change in order to better inform policies that are designed to reduce the very long-run costs of population ageing and to achieve sustainable economic development.OBJECTIVEWhat is the very long-run social value of a given demographic path? What is the value of changes in mortality, immigration, fertility, and labour force participation? How important are shorter-term demographic changes relative to very long-term effects in determining the social value of the demographic path?METHODSA new simulation method is applied for socially evaluating demographic paths, by separating a demographic path into a stable population component and a transition path component. Sensitivity analyses are conducted with respect to demographic assumptions, labour force participation assumptions, and consumption needs by age, returns to scale, and intergenerational value judgements.RESULTSThe application to Australia shows the considerable social cost, in terms of the loss of discounted consumption per capita, of improvements in mortality and gains from higher immigration and increased participation. The effect of fertility, however, is very sensitive to assumptions about the age-specific consumption needs of the population and social value judgements about intergenerational equity.CONCLUSIONSOur method socially evaluates the very long-run implications of specified constant fertility, mortality, and migration, giving consideration to both the transition path and the ultimate stable state. Mortality improvement is costly and higher immigration is beneficial. The impact of higher fertility is sensitive to assumptions about consumption needs and intergenerational equity.(ProQuest: ... denotes formulae omitted.)1. IntroductionThis paper proposes a method for socially evaluating the trajectories of long-run population projections. Governments in developed countries have, in recent decades, become increasingly concerned about the future population ageing that is reflected in their population projections, and which has implications for national prosperity, government budgets3, and sustainable economic development. A range of public policies have been introduced to either slow down population ageing or to ameliorate its effects on national prosperity and government budgets. Policies to slow down ageing include pro-fertility policies such as child subsidies of various kinds (McDonald 2006; Gauthier 2007; Guest and Parr 2010; Parr and Guest 2011; Guest and Parr 2013) and pro-immigration policies (Malmberg 2006). Policies to boost both supply and demand for older workers (OECD 2006)4 are designed to reduce the national economic burden of ageing. Population is also seen as a mediating factor in sustainable economic development. The Australian Government, for example, produced a Sustainable Population Strategy in 2011 (Commonwealth of Australia 2011). Such strategies, however, typically sidestep any social evaluation of the nation's prospective demographic path, and rather focus on the implications of demographic paths for the 'needs' of the population in terms of infrastructure such as water, energy, transport and communication, of government services, education, and training, and of environmental amenity.It is the public policy attention to the economic effects of demographic change that motivates the social evaluation of alternative demographic paths proposed in this paper. The standard approach taken to such evaluations in the population economics literature is to embed demographic structure into an intertemporal macroeconomic model of optimal economic growth and then simulate the long-run effects of demographic change. The seminal study is Cutler et al. (1990), which has spawned a large literature5. A key feature of these models is optimising behaviour of either individual agents or a social planner. …