Demographic Structure and the Macroeconomy

April 24th, 2015
in demographics, macroeconomics

by Yunus Aksoy, Henrique Basso, Tobias Grasl and Ron Smith

Appeared previously at VoxEU, 08 April 2015

The disappointing recovery after the crisis has sparked renewed interest in the medium-run outlook of advanced economies. Lower population growth and its impact on labour supply gained widespread prominence.

Follow up:

This column takes a more general view identifying the impact of the evolution of demographic structure, or the entire age profile, on the macroeconomy. Age profile changes have significant implications for savings, investment and growth but also affect innovation activities. The population aging predicted for the next decades is found to be a significant factor in reducing output growth and real interest rates across OECD countries.

The demographic age profiles in OECD economies are significantly changing. The average proportion of the population aged 60+ is projected to increase from 16% in 1970 to 29% in 2030, with most of the corresponding decline experienced in the 0-19 age group. Demographic changes, in particular their effect on labour supply, are often mentioned as one of the ‘headwinds’ of the observed slowdown in macroeconomic performance in advanced economies (Gordon 2012, 2014; Fernald and Jones 2014). Although important, this narrow interpretation may restrict the impact of demographic changes on the macroeconomy. In this column we take a more general view, arguing that changes in the demographic structure, defined as the variations in proportions of the population in each age group from year to year, matters for macroeconomic activity and may also be related to innovation.

How is the demographic structure relevant?

The demographic structure may affect the long- and short-term macroeconomic conditions through several channels. Different age groups (i) have different savings behaviour, according to the lifecycle hypothesis; (ii) have different productivity levels, according to the age profile of wages; (iii) work different amounts – the very young and very old tend not to work, with implications for labour input; (iv) contribute differently to the innovation process, with young and middle age workers contributing the most; and (v) provide different investment opportunities, as firms target their different needs. Thus, demographic structure changes can be expected to influence real interest rates, inflation and real output in the long and short-term either directly or via their effects on expectations on the future course of key variables.

Changes in the demographic structure affect the macroeconomy

In a recent paper (Aksoy et al. 2015), using a panel of 20 OECD countries over the period 1970-2007, we analyse how much of the variation of key macroeconomic variables can be explained by the evolution of the society’s demographic structure, represented by share of age groups (0-9, 10-19,…, 70+) in the total population. Our methodology allows us to measure the short-run impact and the long-run effects of demographic changes, obtained by assessing how the impact of age profile changes reverberates through the macroeconomy, exploring the interactions between our key variables.

We show that the changing age profile across OECD countries has economically and statistically significant impacts on all key macroeconomic variables and that roughly follows a life-cycle pattern; that is, dependant cohorts (both young and old) tend to have a negative impact on all real macroeconomic variables including real returns and add positive inflationary pressures in the long-run.

We then use the estimates to investigate the impact of the baby-boomers entering the labour market in 1970s and approaching retirement in late 2000s in the individual countries analysed. For the in-sample period of 2000-07, we find that changes in age profile would have contributed to a significant reduction in hours worked, with Japan being the country most significantly affected. Using the United Nations population predictions, we perform an out-of-sample exercise to gauge how future demographic changes may impact output growth and real rates until 2030. We find that in most countries, the decrease in working-age population and fertility and the increase in the proportion of retirees expected for the next 20 years would result in a strong decrease in trend output growth and significantly lower the real interest rate. Figure 1 shows the results for the US, Japan and ‘Core Europe’ (defined as a real GDP-weighted average of Germany, France, Italy and Spain). In Table 1, we show the contribution of demographic changes for output growth of all countries in our sample comparing the in-sample period (2000-2009) with the current decade 2010-19 (based on population predictions). We observe a decline in average annual real output growth due to demographic structure changes across all countries in the sample.

Figure 1. Impact of predicted future demographic structure

Table 1. GDP Growth (2000-2009) vs (2010-2019)

Finally, we show that demographic structure also affects innovation, with older workers (in particular the 50-59 age group) having a strong negative impact on total number of patent applications. In general, innovation, which can be considered a measure of productivity gains, is positively affected by young and middle-aged cohorts and negatively affected by dependants and retirees (Jones 2010; Feyrer 2008).

Demographics, innovation and medium-run economic performance

We also develop a theoretical model to match the lifecycle characteristics observed empirically and to study the main mechanisms through which demographic changes affect the macroeconomy. The economic environment incorporates (i) lifecycle properties with three generations of the population (dependant young, workers and retirees); (ii) investment in human capital; and (ii) endogenous productivity and medium-term dynamics as in Comin and Gertler (2006), and thus allows the study of long-term interactions of demographic changes and savings, investment and innovation decisions. Changing age profiles affect the macroeconomy through three distinct channels. First, changes in fertility and availability of resources of workers affect investment in human capital and the labour supply. Second, ageing affects the saving decision of workers. Finally, the share of young workers impacts the innovation process positively and, as a result, a change in the demographic profile that skews the distribution of the population to the right leads to a decline in innovation activity. The link between demographics and innovation is crucial in matching our empirical findings.

Our simulation results show that:

  1. A relative increase in the share of young dependants and retirees decreases output growth and investment, while an increase in workers does the opposite.
  2. A permanent increase in longevity (an increase in life expectancy) leads to increased growth rates in the short term as the decrease in the marginal propensity for workers to consume leads to a lower real interest rate and an increase in innovative activity. However, as the share of young workers decreases, productivity in innovation decreases, leading to permanently lower output growth and investment.
  3. Finally, we use the UN population predictions to feed into the model the expected changes in population dynamics for different countries in our samples, matching the predictions of the empirical model.

Although our theoretical model only incorporates three age groups (compared to the eight groups in the benchmark estimation), it performs well in capturing the estimated impact of changes in demographic structure on output growth and real interest rates for different countries. Increases in the average age and reduced fertility are found to be strong forces reducing output growth and real rates across OECD countries.


Our empirical and theoretical results indicate the current trend of population ageing and reduced fertility, expected to continue in the next decades, may contribute to reduced output growth and real interest rates across OECD economies. We believe the next decades may witness a shift in the focus of economic policy from short-run stabilisation, which characterised the 1990s and most of 2000s, to medium-run economic performance.


  • Aksoy, Y, H S Basso, T Grasl, and R Smith (2015), “Demographic Structure and Macroeconomic Trends”, Birkbeck Working Papers in Economics and Finance No. 1501.
  • Comin, D and M Gertler (2006), “Medium-Term Business Cycles”, The American Economic Review 96(3), pp. 523-551.
  • Fernald, J G and C I Jones (2014), “The Future of U.S. Economic Growth”, NBER Working Paper No. 19830.
  • Feyrer, J (2008), “Aggregate evidence on the link between age structure and productivity”, Population and Development Review, pp. 78-99.
  • Gordon, R J (2012), “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds”, NBER Working Paper No. 18315.
  • Gordon, R J (2014), “The Demise of U.S. Economic Growth: Restatement, Rebuttal, and Reections”, NBER Working Paper 19895.
  • Jones, B F (2010), “Age and Great Invention”, The Review of Economics and Statistics, 92(1), pp. 1-14.

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