Population Aging & Wealth Inequality Has A Relationship

1 min read
September 22, 2023

A recent working paper from Kyoto University’s Institute of Economic Research (Population Aging and Income Inequality in a Semi-Endogenous Growth Model by Kazuo Mino & Hiroaki Sasaki) unveils the intricate dynamics of population aging and its influence on income and wealth distribution. Interestingly, extending life expectancy reduces inequality while decreasing the population growth rate amplifies it.

The Two Sides of Population Aging

A fresh perspective on income and wealth inequality was recently offered in a study focusing on the continuous-time Overlapping Generations (OLG) model, set against the backdrop of semi-endogenous growth. It unravelled that the stationary distributions of income and wealth predominantly followed a Pareto profile, modulated by population aging dynamics (looks at how different generations interact and impact the economy over time, especially in a setting where growth is driven by technology and population changes).

The study articulated two key findings:

  1. Extended Life Expectancy: An increase in life expectancy reduces the rate of return on capital in a steady-state growth equilibrium. This phenomenon translates to a decline in both income and wealth inequality.
  2. Decreased Population Growth: Conversely, a fall in population growth rate incites an opposite effect by amplifying wealth and income inequality.

While population aging directly magnifies long-run inequality, the net effect on inequality is determined by the balancing act of these opposing forces.

The study’s numerical results emphasized the nuanced nature of these relations. In essence, while reduced mortality rates mitigate inequality, a slowing down of population growth exacerbates it.

Exploring Further Dimensions

The study took a leap further by delving into extended models that considered exogenous productivity growth, agents’ retirement, and the dynamics of a flexible labor supply. Each model was evaluated based on inequality metrics in the steady-state growth equilibrium, shedding light on the broader ramifications of population aging. (i.e. looking at models that included factors like productivity growth from outside sources, people retiring, and changes in the workforce. Each model was checked for inequality during consistent growth to understand how an older population affects the economy.)

The model assumes that if the population changes, the external increasing returns will drive persistent growth in per capita income. In other words, the more people there are, the more income will grow.

The Road Ahead

While the present study offers profound insights, it acknowledges some untouched areas that can further enrich its conclusions. Potential areas include the integration of R&D activities by firms and taking into account endogenous population changes.

Furthermore, the lack of discussion on policy measures was a critical omission from the study. Evaluating the effects of income tax strategies and intergenerational transfer programs within the model could provide policymakers with a comprehensive understanding of leveraging demographic shifts to foster a more equitable society.

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