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Program on the Global Demography of Aging

David E. Bloom, David Canning
Harvard School of Public Health

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The last 150 years have been a period of unusual demographic change. Baby
booms occurred in the aftermath of wars in some countries. In others, baby booms
occurred as a result of falling infant mortality rates and subsequent reductions in fertility.
Baby boom generations produce an echo, in the form of a large cohort of children a
generation later, creating long-term demographic disequilibria. These destabilized age
structures, together with improvements in health and longevity among the elderly, are
producing, for the first time in history, populations with large and growing rates of old
age dependency.
We argue that transitions from high mortality and fertility to low mortality and
fertility can be beneficial to economies as the large baby boom cohorts enter the
workforce and save for retirement, while rising longevity has perhaps increased both the
incentive to invest in education and to save for retirement. We present estimates of a
model of economic growth that highlights the positive effects of demographic change
during 1960-95. We also show how Ireland benefited from lower fertility in the form of
higher labor supply per capita and how Taiwan benefited through increased savings rates.
We emphasize, however, that the realization of the potential benefits associated with the
demographic transition appears to be dependent on institutions and policies, requiring the
productive employment of the potential workers and savings the transition generates.
Population aging is a new phenomenon, which makes it difficult to draw insights
from previous experience. Simple projections based on changes in age structure point to
the possibility of downward pressure on income per capita in developed countries. We
doubt, however, that this will be as large a problem as sometimes claimed. First, income
per capita is not a welfare measure, and looking at consumption, health, and longevity
over the life cycle (a cohort measure of welfare rather than a period measure of output)
gives a rather more optimistic picture.
Second, the simple economic projections tend to be based on an “accounting”
approach that assumes that age-specific behavior remains unchanged, and then sums over
the population age structure. But this approach ignores the potentially powerful effects of
behavior change. Real savings are required to finance the retirement of the aging
population. The aging of the baby boom cohort potentially promotes labor shortages,
creating upward pressure on wages and downward pressure on the real incomes of
retirees. We expect a behavioral response to these pressures in developed economies in
the form of a longer working life, longer working hours, increased labor force participation and utilization rates, and immigration of workers from developing countries.
The argument for a longer working life is supported by the improved health, as well as
increased longevity, of the elderly. Countries that possess financial institutions that best
channel savings into productive investments, and labor market institutions and policies
that best facilitate a supply response to labor shortages and high wages, will be in a
position to mitigate to a large extent the adverse consequences of population aging.

David E. Bloom
Harvard School of Public Health
Harvard University
Department of Population and
International Health
Building I, Room 1110B
677 Huntington Ave.
Boston, MA 02115

David Canning
Harvard School of Public Health
Harvard University
Department of Population and
International Health
Building I, Room 1211
677 Huntington Ave.
Boston, MA 02115
Email: dcanning@hsph.harvard.edu

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