2.3 Individual ageing
Population ageing is being driven by falling fertility rates and rising longevity, a reflection of the fact that individuals are living longer and having fewer children. These demographic parameters are both affected by and affect how individuals behave over their life cycle and subsequently it is important to attempt to understand these, “individual ageing”, dynamics if we are to assess the economic impacts of population ageing.
Studying how individuals behave over their life cycle is an important approach widely used for analysing the economics of population ageing.[4] It allows us to understand the dynamics of fundamental economic variables, such as consumption and savings, at the individual level. In particular, over-lapping generation (OLG) models allow us to analyse life-cycle effects when some people observed in a particular period are in the workforce while others are retired[5].
Examining individual behaviour within the OLG framework can often yield insights over and above those of more traditional macroeconomic models. For example, a simplified view of savings in an economy would suggest that as the proportion of working age people in the population declines, so too will total savings in the economy. Conversely, an OLG model may be constructed that is sensitive to changes in demographic variables such as making the savings-consumption decision dependent, in part, on life expectancy. As life expectancy increases individuals are apt to increase their individual rate of savings, offsetting the reduction in the number of individuals saving as the population ages (Zhang 2001).
Modelling the dynamics of human behaviour may prove particularly useful in analysing the impacts of policy changes within the context of population ageing. At present there is little work being done on this. Some work is being done, however, on microsimulation models which, although they do not directly consider human behavioural responses, can be used to assess the responses of individuals in given income, social, or age groups to changes in policy[6].
Alternatively attention to the dynamics of individual ageing contributes to understanding how economic and social conditions affect demography. There exists an expanding literature that focuses on models that explain how fertility is affected by economic and social variables (Heckman and Willis 1974; Poot and Siegers 1998). One such model suggests that fertility rates in open economies increase with positive changes in long –run real interest rates and decline with positive changes in social security and technological progress (Becker and Barro 1988).
Notes
- [4]For an accessible introduction to this approach see Disney (1996, especially Chs. 1 and 3).
- [5]For a recent example of the application of a life cycle model to simulate the effects of ageing on output, the current account, savings, debt and investment and the capital stock see Faruqee (2002).
- [6]See for example Harding, (2002).
