Macroeconomic effects of demographic change
Research group: Macroeconomy and public finances Research began: 2020 Research ends: 2021 Sponsored by: Prime Minister's Office (VN TEAS funding)

Responsible for research:

Macroeconomic effects of demographic change

Macroeconomic effects of demographic change

Population is currently aging in Finland due to low birth-rates and longer life expectancy. Net immigration is insufficient to compensate low brith-rates and so the number of working-age people is shrinking. Even though the continuation of aging is very likely in the next few decades, there is significant uncertainty regarding birth, mortality and immigrating. Demographic change has significantly effects on macroeconomic variables such as economic growth and investments. The change in age ratio weakens public finances and the current financial structure of the welfare state also weakens the position of future generations in relation to the present. At the same time the ratio between labor income and capital gains is changing.

The aim of this research project is to produce information on future demographic trends and various policies to increase labor supply to economy and public finance. The purpose is to provide information on the overall economic impacts of demographic change to support decision-making. A final report will be compiled on the results of the study which will be completed at April 2021.

The research project uses Etla’s numerical generation model to describe predicted macroeconomic effects of demographic change. The reporting places particular emphasis on labor supply and economic growth. In the process the model also produces the effects of demographic change to public expenditure, income and to the balance far into the future. From the results sustainability gap in different time horizon is calculated.

This research project is divided to four phases.

The first phase focuses on preparing work. Making stochastic population projection for Finland; updating FOG model for pension rules, employment rates and age-related expenditure; creating overview of new key literature about the effects of population aging and an assessment of the effects on public finances and age group participation rates of early career start and shortening of parental leave will be made.

The second phase produces simulation of the effects of population aging to economy, public finances and income distribution between generations.

In the third phase, the estimated employment rate effects of policy measures to extend the beginning of careers are used as input in FOG model to describe effects of policy changes to supply of workforce in relevant age groups.

In the fourth phase, results are presented to steering group, a report to VN TEAS funding series and FOG model report are produced. The results are published through both traditional and social media.

Responsible for research: