Population Economics

Population Change and the Macro-Economy

By now, it is commonly understood that population change, in particular the ageing of populations in many parts of the world, has profound consequences for the performance of the economy as well as for the organisation of the welfare state. Conversely, by changing the conditions under which children are born and raised as well as the incentives to invest in health and education, economic development becomes an important driver of population change.

In this working area we explore the diversity of pathways in which population and economy are interacting, building on population economic models of overlapping generations. While the focus of this research is on the population i.e. macro-economic level, we take full account of the fact that macro-economic variables are determined from aggregated decisions at the micro-level. Thus, our work is grounded in life-cycle modelling (see Human Capital: Health, Education and Labour Supply over the Life-Cycle). Parts of the research carried out under the AGENTA project on intergenerational transfers are based on macro-economic modelling of population change.

Currently we are undertaking work within the following areas:

 

Medical Progress, Population Ageing and Health Expenditure (MEDPRO)

Michael Kuhn, Ivan Frankovic, Stefan Wrzaczek

The nexus of population ageing, health expenditure and medical progress attracts great political and academic interest. While empirical work reveals the mutual dependence of the three phenomena, little is yet known about

  • the nature of their dynamic interrelationship;
  • the incentives for individuals, medical providers and innovators, whose decisions drive the process; and
  • the way in which these incentives and the resulting outcomes are affected by policy-making.

Our objectives are

  • To study how the individual valuation of health and demand for health care varies with medical technology and health care policy
  • To assess the determinants of the private and social value of medical technology
  • To understand the joint dynamics of medical progress, population ageing and health care expenditure based on a realistic economic and demographic modelling
  • To assess the efficiency and sustainability of health care policies in the light of medical and population change

We develop, solve and implement numerically an intertemporal general equilibrium model with overlapping generations subject to endogenous mortality, the latter depending on individual health care and medical technology. In so doing, we explicitly study a three-sector model, where a medical sector (e.g. hospitals) and an R&D sector advancing medical technology operate beside a production sector.

We derive from individual choice an age-specific demand for health care as well as its underlying value. Aggregating across cohorts, we show how the total demand for health care translates, via the medical sector, into a demand for medical innovation. We assess the efficiency of the allocation and how it depends on the competitive and institutional environment. Specifically, we contrast the decentral allocation against a first-best solution, which we derive using age-structured optimal control techniques.

Calibrating the model to US and European data, we examine numerically how the dynamics are shaped by the nature of medical technology, by population change (e.g. exogenous ageing, baby boom/bust) and by policy (e.g. health insurance, provider regulation, patent policy). Our numerical model allows us to trace the out-of-steady-state dynamics.

MEDPRO (medpro-project.eu) is a stand-alone research project (P 26184-G11) funded by the Austrian Science Fund (FWF).

 

Gender and Economic Development

Michael Kuhn

In a series of projects we are exploring the way in which gender differences affect economic development. The focus of our work so far lies on the contribution of female health to economic development as well as on the consequences of anti-female discrimination in the labour market.

In a first project, we analyse the economic consequences for less developed countries of investing in female health. In so doing we introduce a novel microfounded dynamic general equilibrium framework in which parents trade off the number of children against investments in their education and in which we allow for health-related gender differences in productivity. We show that better female health speeds up the demographic transition and thereby the take-off toward sustained economic growth. By contrast, male health improvements delay the transition and the take-off because ceteris paribus they raise fertility. According to our results, investing in female health is therefore an important lever for development policies. However, we also show that households themselves prefer male health improvements over female health improvements because they imply a larger static utility gain. This highlights the existence of a dynamic trade-off between the short-run interests of households and long-run development goals. Our numerical analysis shows that even small changes in health can have a strong impact on the transition process and on income levels in the long run.

In a second project, we analyse the impact of "pure" gender discrimination in wage setting on economic development. To this end, we develop a model of a representative household choosing consumption as well as the number and education of their children akin to the previous model. We show that wage discrimination to the disadvantage of women slows down economic development by distorting downwards the opportunity cost of children. This leaves, for longer than necessary, the economy in a low development regime with high fertility. Explicit modelling of the macro-economic feedback also shows that a moderate level of discrimination may yield a higher level of household utility, implying a possible trade-off between economic development and the interests of the current generation. We illustrate the analytical results by way of numerical examples.

 

Population Structure and Economic Growth

Michael Kuhn

This project assesses the impact of population structure on economic growth. Following recent research, we focus on the generational turnover as a key driver of consumption growth. We characterise the impact of the average birth and death rates on the generational turnover, depending on the age profile of consumption and on the extent of annuity market imperfection. Using recent data from the National Transfer Accounts on consumption profiles for a number of countries, we assess in a comparative way the sign and magnitude of generational turnover and its impact on consumption growth. We find considerable cross-country variation and trace it back to differences in demographic rates and in the consumption structure.

 

Health and Economic Impacts of Climate Change

Ivan Frankovic

Climate change has been named a high and potentially catastrophic risk to human health. It threatens directly through extreme weather events including heat stress, floods and storms but also indirectly through air pollution, spread of diseases and food insecurity. While developing countries are expected to be affected more severely, the developed world is also expected to suffer impacts on human health.

In this project, we aim at understanding the impact of climate-induced health problems on the demand for health care, on the structure of the population, as well as on relevant macroeconomic variables. We develop an OLG economy under the influence of climate change with a realistic demography and endogenous demand and supply of health care. Climate change impacts the economy through multiple channels. First, a degrading environmental quality increases mortality affecting demography and demand for health care. Second, productivity losses are caused by deteriorating climate conditions. We explore how individuals respond to climate change with respect to their life cycle and assess the overall effect on the economy and the health care system. We put special focus on age-specific vulnerabilities of climate-induced health risks and show how the response to climate change varies with age. We solve and implement the model numerically, allowing us to consider various scenarios how climate change affects health and the economy.