Human Capital Accumulation and the Macroeconomy in an Ageing Society

Abstract

How do population ageing shocks affect the long-run macroeconomic performance of an economy? To answer this question we build a general equilibrium overlapping generations model of a closed economy featuring endogenous factor prices. Finitely-lived individuals are endowed with perfect foresight and make optimal choices over the life cycle. In addition to selecting age profiles for consumption and the hours of time supplied to the labour market, they also choose their schooling level and retirement age. Human capital is accumulated as a result of work experience, the extent of which is determined by the intensity of labour supply. As the agent gets older, biological deterioration sets in and human capital depreciates at an increasing rate. This ultimately prompts the agent to withdraw from the labour market. The microeconomic and macroeconomic effects of three ageing shocks are studied, namely an increase in the length of biological life (biological longevity boost), an increase in both biological and productive life span (comprehensive longevity boost), and a decrease in the net birth rate (baby bust). Robustness checks are performed by allowing for capital market imperfections and indivisibility of labour supply.