CoPS/IMPACT Working Paper Number G-172

Title: Modelling the Economic Effects of Population Ageing

Authors: James Giesecke and G.A. Meagher

Abstract

In March 2005, the Productivity Commission released a report on the Economic Implications of an Ageing Australia. The report describes projections for a number of economic variables including population, labour force participation rates, labour supply, employment and hours worked per week. The present paper describes a number of simulations with the MONASH model designed to extend the range of the Commission's earlier analysis. The first is a base case forecast for the Australian economy for the twenty-year period 2004-05 to 2024-25. As far as possible, it is specified so as to maintain consistency with the Commission's projections. The others are alternative forecasts for the same period in which various effects of population ageing have been removed. The alternative forecasts separately identify

• a taste effect due to the removal of age-related shifts in the commodity composition of household consumption,
• a public effect due to the removal of age-related shifts in public consumption,
• a skill effect due to the removal of age-related shifts in hours of employment distinguished by skill (with total hours of employment unchanged),
• a scale effect due to the removal of age-related shifts in total hours of employment (with the skill composition of employment unchanged), and
• a total effect due to the simultaneous removal of all the above age-related shifts.

To accommodate the simulations, the MONASH model itself is reconfigured such that labour by qualification group can be converted into labour by occupation according to Constant Elasticity Transformation (CET) functions. Labour by occupation in its turn can be converted into effective units of industry-specific labour according to Constant Elasticity Substitution (CES) functions. Labour of a partcular skill is then distributed between occupations and industries according to relative wage rates. The scheme incorporates 67 qualification groups, 81 occupations (the ASCO minor groups) and 107 industries (the input-output classification).

JEL classification: C53, C68, J11.

Keywords: computable general equilibrium modelling, population ageing, labour market forecasting.

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