Intertemporal and Inter-Industry Effects of Population Ageing: A General Equilibrium Assessment for Canada Nabil Annabi, Maxime Fougère and Simon Harvey November, 2008 Policy Research Directorate, Labour Market Research and Forecasting
The views expressed in this research are solely those of the authors and do not necessarily reflect the views of HRSDC, nor those of the Government of Canada. 2 2
Projected old-age dependency ratio (OADR) and population growth rate in Canada Note: OADR = Population aged 65+ relative to the working-age population 3
Outline � Objective � Methodology – Model features – Data & Calibration � Simulation Results � Concluding Remarks 4 4
Objective � Simulate the inter-industry and labour market effects of population ageing using a multi-sectoral life-cycle overlapping-generations (OLG) model. � Account for both the supply and demand effects of population ageing. – Supply effect : decline in the labour force growth. – Demand effect : structural changes in final demand due to different consumption preferences of older generations. � Examine the impact on living standards by taking into account not only the change in the OADR but also the lower population growth rate. 5
Model Features � Extended version of Fougère, Mercenier and Mérette (2007) model. – Calibration along a balanced-growth path: account for (Harrod- neutral) labour-augmenting technical progress. – Assume the presence of unemployment on the labour market. – Increased heterogeneity among households: incorporate earning profiles for 25 occupations (National Occupational Matrix, NOC). – Increase the number of generations from 7 to 15: 4-years instead of 10-years model. – Taking into account the difference in the effective age of retirement among occupations. 6
Model Features – cont’d. � Households (generations) maximize an intertemporal utility function subject to a lifetime budget constraint. – The representative household values consumption and bequests. � A representative competitive firm in each of the 14 industrial sectors using intermediate goods, hired labour and rented physical capital in the production process. – The aggregate intermediate input is a CES function of goods produced across industries. – Labour factor is composed of 25 occupations, combining 10 occupational groups and 5 qualification levels. – Aggregate labour is also represented by a CES function of 3 types of labour with high, medium and low elasticity of substitution. 7
Figure 1. Nesting in Sectoral Production Production CES : constant elasticity of substitution L : low elasticity of substitution Cobb-Douglas M : medium elasticity of substitution H : high elasticity of substitution Intermediate Consumption Value Added B,C,D : qualification levels in the NOC matrix Cobb-Douglas Capital Labour Prod. 1 CES-L CES … Type 3 … CES-M Prod.14 Prof. 8 Prof. 7 Prof. 9 … … CES-H CES-H CES-H C D B C D B C D B … … … … 8
Model Features – cont’d. � Following Blanchflower and Oswald (1994) , a “Wage curve” depicts a negative relation between the real wage rate and the occupation-specific unemployment rate. – Local unemployment rate is considered as one of the determinants of the wage rate. – Wages tend to be higher on a labour markets with lower unemployment rate. – Wage-unemployment elasticities based on the estimates in Decaluwé, Lemelin, Bahan and Annabi (2005). � A consolidated government levies taxes to finance expenditures. – Public education and health expenditures fixed per head in each age group � budget shift in favour of health as population ages. � An intermediary represents the pay-as-you-go pension system. 9
Data & Calibration Table 1. Base run statistics Share of sectoral Share in sectoral GDP at factor cost Share of sectoral GDP at factor cost of GDP at factor cost in gross output Labour Capital 34.4 65.3 Primary 3.3 34.4 46.6 Man. & utilities 20.8 32.0 53.2 77.3 Construction 14.8 66.8 22.6 24.4 Transp. & stor. 2.2 65.0 34.8 Communication 1.8 42.5 48.6 51.2 74.0 Wholesaling & ret. 9.2 59.0 25.9 Fin., ins., & RS serv. 10.8 55.7 29.6 70.1 Serv. to firms 4.8 75.7 70.2 29.6 Comput. & serv. 3.2 77.4 70.2 29.6 Public. adm. 11.0 69.4 85.6 14.4 84.1 Education 3.4 63.4 15.9 Health 6.6 64.8 70.3 29.6 Accom. & leis. 1.5 16.5 75.0 24.9 79.4 Other serv. 6.7 73.4 20.6 Source: Input-Output tables, Statistics Canada 10
Table 2. Labour demand by sector and occupation (share, %) Source: Labour force survey, Statistics Canada 11
12 Source: Labour force survey, Statistics Canada Table 2. cont’d.
Figure 2. Distribution of public expenditures on education and health per age group (share, %) Source: Annabi, Harvey and Lan (2007), HRSDC. 13
Figure 3: Spending shares by sector and age group (%) Source: Survey of Household Spending, Statistics Canada 14
Figure 4. Occupation-specific earnings profiles 15 Source: Census 2001, Statistics Canada
Simulation Results: transmission channels � Population ageing implies a slower labour force growth which causes a change in factors remunerations: – rise in wage rates; – capital becomes relatively more abundant and its rental rate declines. � Combined change in wages and rental rate would affect production costs and market prices. – Change in factors reallocation across sectors (subtit. of capital to labour) – Substitution in consumption. � On the other hand, changes in remunerations will affect household’s income: – change in aggregate private demand and savings; – and ultimately investment. 16
Transmission channels - cont’d. � Population ageing would shift private demand in favour of the service goods. – At the sectoral level, production would expand more in sectors with lower labour share in value-added (GDP at factor cost). – Demand effect is expected to mitigate the long-run negative impact on the (labour intensive) service industries compared to the rest of the economy. � Lastly, the profession used intensively in the more expanding industries will benefit the most in terms of remuneration rate. – The decline in population growth rate will be accompanied by a decrease in the unemployment rate which will further increase pressures on wages. 17
18 Macro effects
19 Figure 5: Macro effects (Annual average % growth rate) Simulation results.
20 Figure 6: Impact on factors remunerations (% change from 2006) Simulation results.
Figure 7: Impact on the unemployment rate (Percentage point change from 2006) 21 Simulation results.
Figure 8: Impact on GDP and GDP per capita (Annual average % growth rate) Note: The exogenous labour productivity growth is set equal to the 1996-2006 historical average of 1.9% per year. 22 Simulation results.
23 Inter-industry effects
Figure 9: Base run sectoral labour share and long-run impact on market price 24 Simulation results.
Figure 10: Long-run impact on sectoral production and market price 25 Simulation results.
Figure 11: Long-run impact on factors reallocation (% change from 2006) 70 Production (detrended) Labour demand Capital demand (detrended) 60 50 40 30 20 10 0 -10 -20 Note: Data sorted by increasing change in production. 26 Simulation results.
27 Labour market effects
Figure 12: Impact on unemployment by occupation and skill level (level, %) Management & skill level A Skill level B 28 Simulation results.
Figure 12: Impact on unemployment by occupation and skill level – cont’d. Skill level C Skill level D 29 Simulation results.
Table 3: Impact on unemployment and wages by occupation Base run Unemployment rate Skill unemployment rate (% change from Wage rate level (2006) 2006) - -84 17 Management 1.9 A Bus., fin. & adm. 1.7 -88 16 B 3.0 -87 16 C 4.2 -86 15 A Nat. & app. sciences 1.7 -65 13 B 3.7 -62 12 A Health occupations 0.2 -50 12 B 1.2 -75 15 C 1.8 -67 14 A So. scien., edu., gov. 2.6 -65 13 B 2.8 -75 16 Art, culture, rec. & sports A 2.9 -72 16 B 6.0 -55 10 30 Simulation results.
Table 3: Impact on unemployment and wages by occupation – cont’d. Base run Unemployment rate Skill unemployment rate (% change from Wage rate level (2006) 2006) B 3.6 -69 12 Sales and services C 5.5 -67 11 D 6.3 -57 9 B Trades, tra.& equip.oper. 5.2 -44 10 C 5.5 -55 10 D 9.9 -27 7 B 5.8 -71 15 Occup. in prim. ind. C 5.8 -74 13 D 22.0 -36 6 B Processing, man. and ut. 3.0 -67 11 C 7.5 -49 8 D 11.1 -43 7 31 Simulation results.
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