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Aging and Growth in Europe
Please, find enclosed RN 30th March 2018.
It is necessary to start we a premise (identical to that already underlined in the previous RN). This is only a first simple - ‘back of the envelope’ - guess of the impact of aging across Europe.
This exercise consists of three panel log-log regressions over the period 1995-2017 for 11 European nations: Belgium (BE), Denmark (DE), France (FR), Germany (GE), Greece (GR), Ireland (IR), Italy (IT), Netherland (NE), Portugal (POR), Spain (SP) and United Kingdom (UK).
In the first regression, the log of real per-capita Gdp (LNrGDPpc) is regressed on: the log of the incidence of people aged 65+ on total residents (l1.LNOver65), employment rates in the two age brackets 15-64 and over 65 years (E1564 and E65), a set of regional dummies (i.Country), and a set of yearly dummies (i.Year).
Incidence of 65+ is lagged by one period in order to smooth problems of simultaneity and endogeneity with the dependent variable. Yearly dummies are useful to control for cyclical stances influencing all EU members. Country dummies are meant to capture structural differences across EU Members that stay constant over the observation horizon.
Results are significative and with the expected signs. A 1% increase in the incidence of those aged 65+ can be associated with a 0.368% decrease in real per-capita Gdp.
The second regression is similar to the former one but, instead of the incidence of 65+, now the aging process is captured by national structural dependency ratios (l1.LNDepRatio) that represent the incidence of those aged 65+ and those aged 14- on active people (aged 15-64 years). As for the former case, structural dependency ratios are lagged by one period.
Results continue to appear significative and with the expected signs as well. A 1% increase in the structural dependency ratio can be associated with a 0.803% decrease in real per-capita Gdp.
In the third regression, aging process is captured by one-period-lagged national old structural dependency ratios (l1.LNOldDepRatio) that represent the incidence of those aged 65+ on active people (aged 15-64 years).
Results continue to come out significative and with the expected signs as well. A 1% increase in the old structural dependency ratio can be associated with a 0.376% decrease in real per-capita Gdp.
Employment rates help controlling for the capabilities of countries to contrast economic consequences of aging taking advantage of the contribution of the largest number of active citizens. Both rates (E1564 and E65) are significative in all three regressions. Taking their one-period lag would maintain the expected signs but slightly reduce statistical significance.
As for the conclusion of the previous RN dedicated to the same subject, this very rough evidence confirms the widespread idea that aging is associated with slowing down economies.
On average, in this panel of European countries:
- the share of aged over 65 increased by 28.12% from 1995 to 2017, approximately 1.28% per year, implying an annual slowing down of 0.47% in real per-capita Gdp;
- the structural dependency ratio increased by 9.68% from 1995 to 2017, approximately 0.44% per year, implying an annual slowing down of 0.35% in real per-capita Gdp;
- the old structural dependency ratio increased by 32.24% from 1995 to 2017, approximately 1.47% per year, implying an annual slowing down of 0.55% in real per-capita Gdp.
The slowing down can be seen as a guess on that part of growth that was lost (i.e. did not concretize) because of aging, that means because population composition did not remained constant but continuously evolved into an older one.
In particular the annual slowing down can be seen as a mark-down already incorporated in time series of annual growth rates.
The basic idea for this ‘back of the envelope’ computation comes from a recent NBER paper by N. Maestas, K. J. Mullen and D. Powell who constructed a complete and in-depth macro-econometric set to investigate growth-aging linkage for Us. Though obtained through a much more simplistic approach, results for Europe are, indeed, not so different from what that NBER paper finds for Us. European elasticities seem to be slightly smaller.
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