ECON C175 Chapter Notes - Chapter (Week 6): Population Ageing, Human Capital
Week 6: The Deographi Trasitio
Lee et. al: Is Low Fertility Really a Problem?
• Longer lives and fertility far below the replacement level of 2.1 births per woman are leading to rapid
population aging in many countries
o Fertility well above replacement would typically be most beneficial for government budgets
o Fertility near replacement would be most beneficial for standards of living when the analysis
includes the effects of age structure on families as well as governments
o Fertility below replacement would maximize per capita consumption when the cost of
providing capital for a growing labor force is taken into account
• During childhood and old age, we consume more than we produce through our labor. The gap is
made up in part by relying on accumulated assets. It is also made up through intergenerational
transfers, both public and private, that shift resources from some generations to others with no
expectation of direct repayment.
o Public transfers include: public education, publicly funded health care, public pensions, and
the taxes to pay for these programs
• In the United States, elderly consume far more than young adults and labor income falls off rapidly at
older ages. Public transfer inflows to the elderly are generous, funded largely through public transfer
outflows from the working ages
• FSR is the ratio of taxpayers to beneficiaries and the SR is the ratio of earners to consumers
o Fiscal support ratio (FSR): the number of effective taxpayers, calculated by weighting the
population in each age group by the average taxes paid by that age group in the base year,
divided by the number of effective beneficiaries, calculated by weighting the population in
each age group by per capita benefits received
o The support ratio (SR) is defined as the number of effective workers, the population weighted
by per capita labor income at each age, divided by the number of effective consumers, the
population weighted by per capita consumption at each age
▪ A higher SR indicates proportionally higher resources available per person allowing
for higher consumption, higher saving and investment, or some combination of the
two
o The FSR and the SR provide distinctive perspectives because intergenerational transfers
through the public and private sectors are very different. Especially in rich countries, public
transfers are predominantly to the elderly, whereas private transfers go mostly to children
• Fertility is an important determinant of age structure and because so many governments are
encouraging higher fertility as a result of their concerns about population aging
o Immigration is often suggested to help reduce the population aging that results from low
fertility
▪ However, over time their age distribution tends to become similar to or older than
the age distribution of the receiving population. This occurs because the immigrant
populations age and because immigrant fertility rates typically converge toward the
fertility rates of the receiving population
• Although higher fertility might push the SR higher, this could come at a cost: the increased saving and
investment that would be required to provide capital for the growing labor force
o Low capital cost case: assume that the ratio of capital to output is constant and unaffected by
changing demography
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