Three essays on the endogenous growth of a regional economy under the impacts of demographic changes

Kim, Tae-Jeong

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Description

Title

Three essays on the endogenous growth of a regional economy under the impacts of demographic changes

Author(s)

Kim, Tae-Jeong

Issue Date

2010-05-14T20:50:58Z

Director of Research (if dissertation) or Advisor (if thesis)

Hewings, Geoffrey J.D.

Doctoral Committee Chair(s)

Hewings, Geoffrey J.D.

Committee Member(s)

• Baer, Werner W.
• Bera, Anil K.
• Villamil, Anne P.

Department of Study

Economics

Discipline

Economics

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

• Endogenous growth
• Human Capital
• Overlapping generation model
• Demographic transition
• Inter-regional modelling
• Intra-generational heterogeneity

Abstract

The impact of an ageing population on the economy is one of the key issues in most developed countries. It is a generally accepted notion that an ageing population could cause negative effects, including a decrease of per-capita output and economic welfare, on the economy mainly due to the decline of the labor force and aggregate saving rate. The first chapter adopts the two-sector overlapping generation (OLG) model to capture the impact of population ageing on the regional economy and compares the effectiveness of government policy in an endogenous growth perspective. Comparing the computational results of a one-sector OLG model where agent’s productivity is given exogenously, the simulation result confirms that endogenously determined investment in human capital significantly offsets the negative effects of the ageing population on the regional economy. The chapter also attempts to check if there is room for the government to weaken and prevent the negative effects of the ageing population. For this, this chapter examines the effects of two kinds of government transfer systems on the regional economy: money transfer and educational transfer systems. The money transfer, which is redistributed to agents by the government, could be used for an individual’s consumption, saving and educational investment. Educational transfer is given directly to the individual proportional to his or her opportunity cost stemming from education investment. The result shows that the educational transfer system is superior to money transfer system in the long-run in terms of growth of per-capita income, aggregate welfare and stabilizing the factor prices. However, the results imply that there exists a trade-off relationship in implementing an educational transfer system between economic growth and equity of income and wealth. The second chapter seeks to examine the effects of the ageing population in Illinois with inclusion of the household’s ex-ante intra-generational heterogeneity across race and migration status. For this, this chapter empirically shows that there are significant gaps in returns to education between race and migration status in Illinois; and there exists significant relationships between a resident’s demographics and the probability of in- and out- migration around Illinois. These empirical results, including heterogeneous properties across race and migration status and demographic- related migration tendency, are calibrated into the two-sector OLG model. Using this two-sector OLG model incorporated with the intra-generational heterogeneity over race and migration status, this chapter projects the economic growth of Illinois will decelerate substantially until the mid 2020s due to population ageing. After that time, the growth of Illinois will partially recover. The major economic problems of the ageing era stem from the deficiency of the labor force. Also the Black’s unemployment rate tends to be substantially high in Illinois. Taking the two labor market- related problems of ageing population and high Black’s unemployment into consideration, the government could implement a labor policy measure aiming at increasing the employment rate of the Black to the level of the other races through the absorption of the unemployed Blacks by offering industry subsidies or incentives. However, the result shows that an indirect educational policy, targeting the upgrading of the transmission channel of human capital stock from the old generation to the young generation of the Black, is more preferable than the direct employment policy in terms of long-run effects on per-capita income and social welfare. Also, this chapter shows that the effects of the government’s immigration policy, which aims at replacing low-productive international immigrants with native, relatively high-productive unemployed individuals who have been unemployed, are very limited in terms of per-capita income, welfare and aggregate productivity. On the contrary, tax and transfer policy inducing international immigrants to invest more in their education works relatively better. Furthermore, under this policy scheme, the native’s human capital stock also improves significantly because of positive spillover effects even though the transfer system’s direct beneficiary is the international immigrant group. The third chapter attempts to project the economic paths for the individual Midwest states (Illinois, Indiana, Michigan, Ohio and Wisconsin, as well as the Rest of the US) in the future when the population ageing becomes more pronounced. To accomplish this task, a dynamic general equilibrium model is developed so that it could incorporate the inter-regional transactions and endogenous growth mechanisms within the framework of an OLG model. Key parameter values associated with the regional interconnections were assigned by using multi-regional Social Accounting Matrix (SAM) of the Midwest states. Two different steady-state results were presented with the two different age-cohort population structures corresponding to year 2007 and 2030. These steady-state results imply that there should be considerable negative impacts on the regional economies in the sense of declining per-capita output. The rate of declining of per-capita output are projected to be heterogeneous across the regions due to the different developments of age-cohort population structures and consequently different levels of endogenously determined educational investment of workers. Furthermore, the regions could be grouped separately according to the levels of average human capital stock of workers: high-skilled and low-skilled regions, being roughly consistent with actual labor productivity statistics. It is intuitive that the supply-demand interactions between the regions should be affected by developments of demographics in each region. This intuition is consistent with the simulation results in the sense that the result revealed the development of output price in a certain region reflects the dynamics of demographics of every region. Meanwhile, according to the dynamic simulation, the negative impacts of population ageing will not be so severe unlike what was presented in the steady-state results. This mitigation of negative effects could be attributed mainly to the growth of human capital stock of workers. The dynamic simulation results reveal that the per-capita output of every region is projected to grow positively in the near future when the population ageing will be pronouncing. However, the growth rate of the per-capita output is projected to be heterogeneous across the regions: the regions with high-skilled workers hold the potential threat that population ageing could give more negative impacts on the economy due to the relatively sluggish growth of human capital stock. Also, the dynamic simulation results show that certain regions in Midwest will experience their terms-of-trade deteriorate in the near future, implying that careful attention should be given to their future trade conditions.

Graduation Semester

2010-5

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Copyright 2010 Tae-Jeong Kim

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