Economic consequences of changing fertility. Insights from an OLG model

OLG analysis of fertility shocks

Economic consequences of changing fertility.Insights from an OLG model

Magdalena Malec1 2 Krzysztof Makarski123 Pawel Strzelecki123

with help from Oliwia Komada

1Warsaw School of Economics2GRAPE

3Economic Institute, National Bank of Poland

EPC 2016. Presentation: 02.09.2016

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Motivation

Economic response to succesfull family policy

Projections beyond accounting - economic reactions of agents

How to measure changes in fertility: Number of children and labour force participation

Contributions:1 �scal and welfare analyses of pension systems using Overlapping Generations Model

(OLG) under di�erent fertility scenarios2 the �nal version of the model will also include changes in parity progression rates

Today: the use of OLG model to asess the economic gains from higher fertility withexample

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Motivation

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Motivation

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Motivation

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Motivation

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Motivation

Questions

How does demographics a�ect macroeconomic and �scal stability?with lower fertility ⇒ less labor supply ⇒ worse economic dependency ratiobut expecting lower fertility rational agents make provisionswhat if demography surprises and what if not?

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Motivation

Questions

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Motivation

Questions

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Motivation

Questions

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Motivation

What do we do?

We develop an OLG model and use it to �measure� the e�ects of fertility on theeconomy

Things we really care for:private and public savings (inter-temporal choice)labor supply decision (intra-temporal choice)pension system is �scally neutral (de�ned contribution)calibrating the model closely to the dataexogenous but varying economic growth (technological progress)exogenous but varying fertility

Things we simplify:production sector (competitive producers with C-D production function anddepreciation)labor market (elastic labor)no heterogeneity within cohorts

stable mortality (focus on fertility, isolate)

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Motivation

What do we do?

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Motivation

What do we do?

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Motivation

What do we do?

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Motivation

What do we do?

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Motivation

What do we do?

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Motivation

What do we do?

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Motivation

What do we do?

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Motivation

What do we do?

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Motivation

What do we do?

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Motivation

What do we do?

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Motivation

What do we do?

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Motivation

What do we do?

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Roadmap

1 Motivation

2 Model

3 Calibration

4 Results

5 Summary

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What we expect before modeling?

with fertility below replacement population shrinks

but per capita �economy� is constant (driven by deep parameters)

shocks in fertility will necessitate adjustment↑ savings (to match the same K/L)↑ output (as a consequence of ↑ K)↓ taxes ceteris paribus

HENCE transitory lasting e�ects (↑ population, ↑ capital, ↑ output)transitory welfare e�ects

a tool to test �can we a�ord a given fertility policy�a way to show, who pays and who gains

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Consumers

are paid a market clearing wage for labor supplied

receive market clearing interest on private savings

are free to choose how much to work, retire at J̄

die with certitude at J , but have a non-zero probability of dying before

Optimize lifetime utility derived from leisure and consumption

Uj(cj,t, lj,t) = uj(cj,t, lj,t) +

J−j∑s=1

δsπj+s,t+sπj,t

u (cj+s,t+s, lj+s,t+s) (1)

subject to

(1 + τc,t)cj,t + sj,t + τj + υt = (1− τ ιj,t − τl,t)wj,tlj,t ← labor income

+ (1 + rt(1− τk,t))sj,t−1 ← capital income

+ (1− τl,t)pι,j,t + bj,t ← pensions + bequests

where u(c, l) = φ log(c) + (1− φ) log(1− l)

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Producers

maximize

Yt − wtLt − (rkt + d)Kt subject to Yt = Kαt (ztLt)

1−α

where the path of {z}∞t=0 is exogenous (calibrated to AWG, by EC)

Interest rate

interest rate on capital rkt = MPK − d, endogenous

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Producers

maximize

Yt − wtLt − (rkt + d)Kt subject to Yt = Kαt (ztLt)

1−α

where the path of {z}∞t=0 is exogenous (calibrated to AWG, by EC)

Interest rate

interest rate on capital rkt = MPK − d, endogenous

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Public �nances

Social Security Institution (ZUS) collects social security contributions and pays outpensions

by construction of NDC, system �scally balanced (full actuary fairness)

Government

collects taxes on earnings, interest and consumption + υ

spends �xed amount of GDP on consumption + services debt

long run debt/GDP ratio �xed

Role of + υ

if fertility did not change, υ would measure per capita tax/subsidy

once fertility changes, we may measure deviations from υ

express as % of initial GDP = gains from higher fertility

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Public �nances

Government

Role of + υ

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Public �nances

Government

Role of + υ

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What are the fertility shocks?

1 We start from decreasing population (fertility below replacement) ⇐ matched to data

2 For some �xed period of time, we allow fertility changesudden, unexpected increase in the entry size by 10% for 10 yearssudden, unexpected increase in the entry cohort size by 20% for 10 yearsadditionally: sudden, unexpected decrease in entry cohort size by 10% for 10 years

3 Compute υ̃ relative to before change υ (expressed as % of GDP or in raw terms)

What is baseline?

Constant mortality

Gradually decaying technological progress (fully expected)

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What is baseline?

Constant mortality

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What is baseline?

Constant mortality

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What is baseline?

Constant mortality

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Calibration

Roadmap

1 Motivation

2 Model

3 Calibration

4 Results

5 Summary

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Calibration

Calibration to replicate 2010 economy

Preference for leisure (φ) matches participation rate of 56.8%

Contribution rate (ρ) matches bene�ts/GDP ratio of 6%

Labor income tax (τl) set to 11% to match PIT/GDP ratio

Consumption tax (τc) set to match VAT/GDP ratio

Capital tax (τk) de iure = de facto

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Calibration

Labor augmenting technological progress

Historical data, projection from AWG, new steady state at 1.7%

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Calibration

Baseline fertility and other scenarios

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Results

Roadmap

1 Motivation

2 Model

3 Calibration

4 Results

5 Summary

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Results

What are the gains from higher fertility?

Due to decreasing population, per capita taxes in general grow (= how much consumptionpeople have to give up)

(relative to initial steady state of app. 4.6% of GDP)

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Results

What are the gains from higher fertility?

If population is shrinking less, taxes grow by less

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Summary

Roadmap

1 Motivation

2 Model

3 Calibration

4 Results

5 Summary

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Summary

A proof of concept?

We want to use macro models to evaluate e�ects of di�erenet demographic scenarios

Demographics drives majority of the macroeconomic changes in the foreseeable future

Fiscal e�ects will be large and unavoidable but larger TFR can mitigate them

Strong (political) discussions about ways to prevent �demographic catastrophe�...

...but what is the adequate cost of family policy - even if successful?

Figures we obtain go beyond the simple calculations in Excel (forward looking agents)

Full model with fertility choice

Analyze alternative paths of fertility changes (more multiple vs less childless families)

Provide welfare measures (caveat: welfare of the otherwise born and otherwisenot-born)

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Summary

A proof of concept?

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Summary

A proof of concept?

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Summary

A proof of concept?

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Summary

A proof of concept?

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Summary

A proof of concept?

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Summary

A proof of concept?

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Summary

A proof of concept?

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Economic consequences of changing fertility. Insights from an OLG model

Economy & Finance

Transcript of Economic consequences of changing fertility. Insights from an OLG model