|Author Name||KITAO Sagiri (Faculty Fellow, RIETI) / MIKOSHIBA Minamo (University of Tokyo) / TAKEUCHI Hikaru (Government Pension Investment Fund, Japan (GPIF))|
|Creation Date/NO.||May 2019 19-E-039|
|Research Project||Individuals' Lifecycle Behavior and Macroeconomic Analysis under Demographic Aging: Effects of fiscal and social security policies|
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The speed and magnitude of the ongoing demographic aging in Japan are unprecedented. A rapid decline in the labor force and a rising fiscal burden to finance social security expenditures could hamper growth over a prolonged period. We build a dynamic general equilibrium model populated by overlapping generations of males and females who differ in employment type and labor productivity in addition to life expectancy. We study how changes in the labor market over the coming decades will affect the transition path of the economy and fiscal situation of Japan. We find that a rise in the labor supply of females and the elderly of both genders in extensive margin and in productivity can significantly mitigate the effects of demographic aging on the macroeconomy and reduce fiscal pressures, despite a decline in wages during the transition. We also quantify effects of alternative demographic scenarios and fiscal policies. The study suggests that a combination of policies that remove obstacles hindering the labor supply and that create a more efficient allocation of male and female workers of all age groups will be critical to keeping government deficits under control and raising incomes across the nation.