Global Growth, Aging and Inequality Across and within Generations

Abstract

The world’s leading economies, both developed and developing, are engaged in an ever changing economic symbiosis that is governed in large part by demographics and technological change, but also by pension, healthcare, and other fiscal policies. This interconnected economic evolution - what economists call general equilibrium growth - holds important implications for inequality across and within generations. This paper presents such a general equilibrium model. It features six goods, five regions, three skill groups, and 100 overlapping generations each making life-cycle consumption and labor supply decisions. The model pays special attention to the evolution of the Chinese and Indian economies. Thanks to their rapid technological advance and vast populations, these nations will play an ever more dominant role in determining the world’s supplies of capital and labor, particularly unskilled labor. The good news for the developed world is that China and India will supply it with major amounts of capital over time thanks to their high saving rates. The bad news is that these economies are also likely to bring much more unskilled relative to skilled labor onto the market which will, over time, dramatically reduce the relative wages of unskilled workers in the U.S., Europe, and Japan. This relative increase in the world supply of unskilled workers reflects, in large part, simply the fact that China and India are gradually bringing each of their skill groups up to Western standards, but that they have relatively more unskilled labor in their work forces.