Demographic Obstacles to European Growth

Abstract

Since the early 1990's the growth rates of the four largest European economies — France, Germany, Italy, and the United Kingdom — have slowed. This persistent slowdown suggests a low-frequency structural change is at work. A combination of longer individual life expectancy and declining fertility have led to gradually ageing populations. Demographic change affects economic growth directly through aggregate savings and labor supply decisions and also indirectly through the pension systems and the need to fund them. Taxes to fund pension systems may impose additional distortions to individual factor-supply choices. We quantify the growth effects from ageing and from the financing of public pensions, and we study the welfare consequences of some reforms that have been suggested to increase late-life labor supply, and through that, long-run growth.

Keywords: economic growth, life-cycle labor supply and savings, ageing, mortality, fertility

JEL Classification: F21, J21