Population, Pensions, and Endogenous Economic Growth

We study the effect of a declining labor force on the incentives to engage in labor-saving technical change and ask how this effect is influenced by institutional characteristics of
the pension scheme. When labor is scarcer it becomes more expensive and innovation
investments that increase labor productivity are more profitable. We incorporate this
channel in a new dynamic general equilibrium model with endogenous economic growth
and heterogeneous overlapping generations. We calibrate the model for the US economy
and obtain the following results. First, the effect of a decline in population growth on labor
productivity growth is positive and quantitatively significant. In our benchmark, it is
predicted to increase from an average annual growth rate of 1.74% over 1990–2000 to
2.41% in 2100. Second, institutional characteristics of the pension system matter both for
the growth performance and for individual welfare. Third, the assessment of pension
reform proposals may depend on whether economic growth is endogenous or exogenous.