Endogenous Technological Change Along the Demographic Transition

Abstract

Does population ageing hurt output per capita? Standard life-cycle models with exogenous growth that emphasise two opposing forces, capital deepening versus declining employment rates, predict yes. Using a quantitative overlapping generations model with realistic demographics and R&D-driven endogenous growth, this paper challenges that prediction through a third channel: that ageing-induced increases in household savings also finance R&D investment and therefore generate technological progress. Calibrated to the United States, the model implies that the demographic transition between 1950 and 2100 increases annual per-capita growth by 0.33 percentage points until 2000 and by 0.16 percentage points overall, thereby accounting for 15 to 20 percent of observed US growth and cumulating into a 27.5 percent permanently higher level of output per capita by 2100. The key mechanism is endogenous technological change, whose growth contribution triples that of capital deepening; shutting down this channel eliminates the positive impact altogether.