by Misbah Tanveer Choudhry, Lahore University of Management Sciences, Pakistan - Enrico Marelli, Department of Economics and Management, University of Brescia - Marcello Signorelli, Department of Economics, University of Perugia
This paper explores the relationship between the age composition of the population and labor productivity. This relationship is important because countries almost continuously pass through different demographic phases. While developed nations are characterized by a rapidly increasing aging population share, youth dependency in developing and emerging economies is still quite high, despite a declining trend.
A better understanding of how these changes in age composition affect labor productivity growth is very important for a meaningful analysis of economic growth potential and realization.
In this paper, we use a panel of up to 108 countries4 to examine the determinants of labor productivity (output per worker) growth over the period 1980-2010. Along with other socio-economic determinants of labor productivity growth, our main focus is on the role played by changes in the demographic structure of a country.
There is a large body of literature on demographic transition and economic growth, suggesting that an increase in the working age population share or a decline in the dependent population can promote economic growth. Examples are Sarel (1995), Bloom and Williamson (1998), International Monetary Fund (2004), Kelley and Schmidt (2005) and Choudhry and Elhorst (2010). Valli and Saccone (2011) find and explain an inverted-U curve between the growth rate of population and the growth rate of the per-capita GDP. The effects of participation and of the age composition of the labor force on labor productivity have also been analyzed: see Kogel (2005), Feyrer (2007) and Choudhry and Van Ark (2010).
The hypothesis that we test in this paper is whether the age structure of the total population not only directly affects cross-country labor productivity growth differentials but also indirectly affects the effectiveness of other determinants of labor productivity growth. To our knowledge, no other study has investigated this hypothesis before. Moreover, with a few exceptions (see e.g. Islam, 2008), most studies on productivity growth have focused on high-income OECD countries. Apart from considering both advanced and developing economies, we also analyze whether the effects in high-income OECD countries5 are different from those in other countries.
We focus on labor productivity and factor inputs (other than labor) rather than on total factor productivity (TFP). We decided to follow this approach instead of investigating the efficiency with which these inputs are used because TFP remains a residual factor in growth empirics. Nevertheless, it is recognized that TFP plays an important role in explaining cross-country differences in output per capita (see e.g. King and Levine, 1994; Prescott, 1998; Hall and Jones, 1999; Kogel, 2005; Islam, 2008).
Our results show that child dependency has a stronger adverse effect on labor productivity than old age dependency. Moreover, higher age dependency negatively impacts on labor productivity growth not only directly but also indirectly by modifying the impact of other social, economic and infrastructural determinants. More specifically, we find that the marginal effects of gross capital formation, labor market reforms, and information and communication technology investment are statistically significant and higher at lower levels of age dependency. These findings hold for both developed and developing economies. Conversely, the marginal effect of savings increases at higher levels of age dependency but is statistically insignificant. On the other hand the marginal effect of savings at higher levels of age dependency in high income countries appears to be greater than in other countries.
4 The sample of countries varies from 102 to 108 countries depending on data availability for the explanatory variables.
5 For the sake of brevity, we will refer to high-income OECD countries as ‘developed economies’ in the rest of the paper, while other economies will be referred to as
‘developing economies’.
