Population Aging, Government Policy and the Postwar ... · The Postwar Japanese Economy Aging and...
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Population Aging, Government Policy and the PostwarJapanese Economy
Keisuke Otsu and Katsuyuki Shibayama
University of Kent
27 December 2016
Otsu & Shibayama (Kent) Aging 12/27 1 / 33
IntroductionMotivation
Japan has gone through rapid population aging over the past fewdecades
decline in the share of working age population (15-64) among adults(15+)decline in adult population growth rate
How important is population aging and related government policies inaccounting for postwar Japanese growth?
Otsu & Shibayama (Kent) Aging 12/27 2 / 33
IntroductionPostwar Japanese Growth
1960 1970 1980 1990 2000 2010
Out
put p
er A
dult
500,000
1,000,000
5,000,000
Figure: Real GDP per adult
Otsu & Shibayama (Kent) Aging 12/27 3 / 33
IntroductionPopulation Aging
1960 1970 1980 1990 2000 2010
Popu
latio
n (1
0 Th
ousa
nds)
0
2000
4000
6000
8000
10000
12000
1564 Years Old65+ Years Old
Figure: Population Share 1955-2014
Otsu & Shibayama (Kent) Aging 12/27 4 / 33
IntroductionRelated Studies
Neoclassical model for postwar Japanese growth
Christiano (1989), King and Rebelo (1993): capital destruction andsubsistence consumptionHayashi and Prescott (2002), Chen, Imrohoruglu and Imrohoroglu(2006): productivity growth
Demographic effects on Japanese output
Chen, Imrohoruglu and Imrohoroglu (2007), Braun, Ikeda and Joines(2009), Yamada (2012): productivity dominates demographic effects inOLG
Labor decline
Hayashi and Prescott (2002), Yamada (2012): cut in the workweekduring the lost decadeBraun, Ikeda and Joines (2009): reduction in family size
Otsu & Shibayama (Kent) Aging 12/27 5 / 33
IntroductionContribution
This paper
constructs a parsimoneous neoclassical growth model with young andold adultsquantitatively decomposes Japanese growth 1975-2014 into the effectsof
population agingproductivitygovernment distortions
Otsu & Shibayama (Kent) Aging 12/27 6 / 33
The Postwar Japanese EconomyDemographic, Productiviy and Government Variables
196 0 197 0 198 0 199 0 200 0 201 0 202 00 .55
0 .6
0 .65Demographics
0 .0 2
0
0 .02
a g i n gp o p u l a t i o n g ro wth
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 5750
800
850
900
950
100 0
105 0
110 0Productivity
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 50 .12
0 .14
0 .16
0 .18
0 .2
0 .22
0 .24
0 .26
0 .28
0 .3Fiscal Policy
g o v e rn m e n t c o n s u m p ti o nl a b o r ta xc a p i ta l ta x
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 570
71
72
73
74
75
76
77Workweek Policy
Figure: Exogenous VariablesOtsu & Shibayama (Kent) Aging 12/27 7 / 33
The Postwar Japanese EconomyAging and Decline in Employment Rate
1960 1970 1980 1990 2000 20100.55
0.6
0.65
0.7
DataProjected
Figure: Aging Effect on Employment Share
Otsu & Shibayama (Kent) Aging 12/27 8 / 33
ModelOverview
Representative household consists of young and old adults (no kids)
a fraction ηt are young and have high employment rate πya fraction 1− ηt are old and have low employment rate πohead of household allocates resources among the familyThe number of households Nt increases over time at the rate nt
Firm hires labor and capital to produce output
Government taxes the household by labor and capital income tax andlumpsum tax
Otsu & Shibayama (Kent) Aging 12/27 9 / 33
ModelHousehold Problem
Preferences
U = max∑t
βt[Ψ ln ct + et (1−Ψ) ln
(ht − ht
)], (1)
whereet = ηtπy + (1− ηt )πo
Budget constraint
ct + it = (1− τl ,t )wthtet + (1− τk ,t ) rtkt + ζt , (2)
Capital law of motion
(1+ nt )kt+1 = it + (1− δ)kt , (3)
Otsu & Shibayama (Kent) Aging 12/27 10 / 33
ModelHousehold Problem
Weekly leisure of the workers (et )
leisuret = ψ ln(restt ) + (1− ψ) ln(weekendt )
where
restt = (ω−ωt )× workweektweekendt = ω× (7− workweekt )
therefore
leisuret = ψ ln(ht − ht
)+ (1− ψ) ln (ω× (7− workweekt ))
whereht = ω× workweekt , ht = ωt × workweekt
weekend is exogenous and does not affect choices (due to seperability)
Otsu & Shibayama (Kent) Aging 12/27 11 / 33
ModelFirm Problem
ProductionYt = AtK θ
t (htetNt )1−θ ,
soπtNt = Yt − wthtetNt − rtKt ,
or in per family terms
πt = yt − wthtet − rtkt .
Otsu & Shibayama (Kent) Aging 12/27 12 / 33
ModelGovernment
Government budget constraint
Gt = τl ,twthtetNt + τk ,t rtKt − ζtNt . (4)
where assumeGt = gtYt .
so that(1− gt )yt = ct + it (5)
Otsu & Shibayama (Kent) Aging 12/27 13 / 33
ModelEquilibirum
Equilibirum conditions
Ψct
= µt
1−Ψht − ht
= µt (1− τl ,t )wt
(1+ nt )µt = βµt+1 {(1− τk ,t+1)rt+1 + 1− δ}
rt = θytkt
wt = (1− θ)ythtet
(1+ nt )kt+1 = it + (1− δ)kt ,
yt = Atkθt (htet )
1−θ
(1− gt )yt = ct + it
Otsu & Shibayama (Kent) Aging 12/27 14 / 33
Quantitative AnalysisAlgorithm
Shooting algorithm
8 variables {kt+1, µt , ht , yt , ct , it , rt ,wt} ,8 equilibirum conditions for1975-2014specify initial and terminal conditions
initial capital = data in 1975terminal capital = steady state capital given constant productivitygrowth, taxes etc. after terminal period
search for the tragectory of capital that satisfies all equilibirumconditions and the terminal condition
Otsu & Shibayama (Kent) Aging 12/27 15 / 33
Quantitative AnalysisCalibration
Table 7. Parameter Values
θ Capital Income Share 0.404β Subjective Discount Factor 0.956δ Capital Depreciation Rate 0.088Ψ Preference Weight 0.494
Otsu & Shibayama (Kent) Aging 12/27 16 / 33
Quantitative AnalysisBenchmark Simulation
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 5
106
2 .8
3
3 .2
3 .4
3 .6
3 .8
4
4 .2
4 .4
4 .6
4 .8Output
d a tab e n c h m a rk m o d e l
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 538
39
40
41
42
43
44
45
46
47Hours Worked
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 5
106
1 .5
2
2 .5
3Consumption
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 5
106
0 .5
0 .6
0 .7
0 .8
0 .9
1
1 .1
1 .2
1 .3
1 .4
1 .5Investment
Figure: Simulated Variables: BenchmarkOtsu & Shibayama (Kent) Aging 12/27 17 / 33
Quantitative AnalysisCounterfactual Simulation: Constant Demographics
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 5
106
2 .5
3
3 .5
4
4 .5
5
5 .5Output
b e n c h m a rk m o d e lc o n s ta n t a g i n gc o n s ta n t p o p u l a ti o n g ro wth
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 536
37
38
39
40
41
42
43
44
45Hours Worked
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 5
106
1 .6
1 .8
2
2 .2
2 .4
2 .6
2 .8
3Consumption
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 5
105
5
6
7
8
9
10
11
12
13Investment
Figure: Simulated Variables: No Demographic TransitionOtsu & Shibayama (Kent) Aging 12/27 18 / 33
Quantitative AnalysisCounterfactual Simulation: Constant Productivity
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 5
106
2 .8
3
3 .2
3 .4
3 .6
3 .8
4
4 .2
4 .4
4 .6
4 .8Output
b e n c h m a rk m o d e lc o n s ta n t p ro d u c t i v i ty
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 538
39
40
41
42
43
44
45
46Hours Worked
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 5
106
1 .6
1 .8
2
2 .2
2 .4
2 .6
2 .8Consumption
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 5
105
5
6
7
8
9
10
11
12Investment
Figure: Simulated Variables: Constant ProductivityOtsu & Shibayama (Kent) Aging 12/27 19 / 33
Quantitative AnalysisCounterfactual Simulation: Constant Fiscal Policy
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 5
106
2 .5
3
3 .5
4
4 .5
5
5 .5Output
b e n c h m a rk m o d e lc o n s ta n t g o v e rn m e n t c o n s u m p ti o nc o n s ta n t l a b o r ta xc o n s ta n t c a p i ta l ta x
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 536
37
38
39
40
41
42
43
44
45
46Hours Worked
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 5
106
1 .5
2
2 .5
3Consumption
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 5
105
5
6
7
8
9
10
11
12
13
14Investment
Figure: Simulated Variables: Constant Fiscal PolicyOtsu & Shibayama (Kent) Aging 12/27 20 / 33
Quantitative AnalysisCounterfactual Simulation: Constant Workweek
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 5
106
2 .5
3
3 .5
4
4 .5
5
5 .5Output
b e n c h m a rk m o d e lc o n s ta n t wo rk we e k
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 538
39
40
41
42
43
44
45Hours Worked
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 5
106
1 .6
1 .8
2
2 .2
2 .4
2 .6
2 .8
3Consumption
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 5
105
5
6
7
8
9
10
11
12
13
14Investment
Figure: Simulated Variables: Constant WorkweekOtsu & Shibayama (Kent) Aging 12/27 21 / 33
Quantitative AnalysisSummary
Productivity growth is by far the most important driver of growth
Population aging increases hours worked but reduces total labor andhence output by 8.4%
Population shrinking reduced capital dilution and increased output by5.9%
Government consumption increased otuput by 3.9%
Labor income tax reduced output by 8.1%
Workweek shortening reduced output by 9.6%
Otsu & Shibayama (Kent) Aging 12/27 22 / 33
Population Aging and Structural TransformationData
1975 1980 1985 1990 1995 2000 2005 2010 20150.7
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
Nominal Expenditure RatioRelative Price
Figure: Structural Change Data
Otsu & Shibayama (Kent) Aging 12/27 23 / 33
Population Aging and Structural TransformationOverview
Representative household consumes goods and services
old relatively prefers services more than younggovernment subsidizes service consumption
Firm produces goods and services
Government taxes the household by labor and capital income tax andlumpsum tax and subsidezes service consumption
Otsu & Shibayama (Kent) Aging 12/27 24 / 33
Population Aging and Structural TransformationHousehold
Consumption
cy ,t =(
ω1εy c
ε−1ε
yg ,t + (1−ωy )1ε c
ε−1ε
ys ,t
) εε−1,
co ,t =(
ω1εo c
ε−1ε
og ,t + (1−ωo )1ε c
ε−1ε
os ,t
) εε−1,
Budget constraint
ηt (cyg ,t + (1− sy )ptcys ,t ) + (1− ηt )(cog ,t + (1− so )ptcos ,t ) + it= (1− τl ,t )wthtet + (1− τk ,t ) rtkt + ζt ,
Otsu & Shibayama (Kent) Aging 12/27 25 / 33
Population Aging and Structural TransformationFirms
Production
yg ,t = Ag ,tkθg ,t (hg ,teg ,t )
1−θ ,
ys ,t = As ,tkθs ,t (hs ,tes ,t )
1−θ .
Relative price of services
pt =Ag ,tAs ,t
.
Otsu & Shibayama (Kent) Aging 12/27 26 / 33
Population Aging and Structural TransformationGovernment
Government budget constraint
Gt = St + G̃t= τl ,twthtetNt + τk ,t rtKt − ζtNt .
whereSt = ηtsyptcys ,t + (1− ηt )soptcos ,t .
Otsu & Shibayama (Kent) Aging 12/27 27 / 33
Population Aging and Structural TransformationQuantitative Exercise
Table 8. Parameter Values II
ε Consumption Elasticity 0.3ωy Preference Weight Young 0.55ωo Preference Weight Old 0.2sy Subsidy Rate Young 0.1so Subsidy Rate Old 0.25
Otsu & Shibayama (Kent) Aging 12/27 28 / 33
Population Aging and Structural TransformationQuantitative Exercise
Nominal expenditure share
ptcs ,tcg ,t
=
(ηt1−so1−sy
ωo1−ωo
((1−so )pt )ε−1+1ωy1−ωy
((1−sy )pt )ε−1+1+ 1− ηt
)(
ηt1+ 1−ωo
ωo((1−so )pt )1−ε
1+ 1−ωyωy
((1−sy )pt )1−ε + 1− ηt
) pt(ωo1−ωo
((1− so )pt )ε) .
where pt and ηt from data
Otsu & Shibayama (Kent) Aging 12/27 29 / 33
Population Aging and Structural TransformationQuantitative Exercise
Subsidy share of government consumption
φt =StCt× CtGt
where
StCt
= ηtsy
1− sy1
1+ ωy1−ωy
((1− sy )pt )ε−1
+(1− ηt )so
1− so1
1+ ωo1−ωo
((1− so )pt )ε−1 .
and CtGtfrom data
Otsu & Shibayama (Kent) Aging 12/27 30 / 33
Population Aging and Structural TransformationQuantitative Exercise
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 50 .7
0 .8
0 .9
1
1 .1
1 .2
1 .3
1 .4
1 .5Nominal Consumption Ratio
Da taBe n c h m a rkNo Ag i n g
197 5 198 0 198 5 199 0 199 5 200 0 200 5 201 0 201 50 .2
0 .25
0 .3
0 .35Government Subsidy Share
Da taBe n c h m a rkNo Ag i n g
Figure: Structural Change SimulationOtsu & Shibayama (Kent) Aging 12/27 31 / 33
Conclusion
A parsimoneous model can capture the effects of demographics,government policy and productivity
Population aging harms growth through
decline in labor participationincrease in social security tax burden
Population aging contributes to structural transformation by
increasing the share of services relative to goodsincrease in government expenditure
Otsu & Shibayama (Kent) Aging 12/27 32 / 33
Extensions
OLG?: intertemporal inequality
Non-separable utility?: intratemporal inequality
Variable employment rate?: should amplify the result
Population aging and productivity?: endogenous growth?
Otsu & Shibayama (Kent) Aging 12/27 33 / 33