Workforce Aging and Economic Productivity: The Role of Demand for Labor

Alexia Fuernkranz-Prskawetz, Vienna Institute of Demography
Thomas Fent, Vienna Institute of Demography
Ross Guest, Griffith University

The aim of this paper is to study the sensitivity of projected economic productivity (measured by output per worker) for the G7 countries with respect to projected labor force participation rates, the age-productivity profiles of workers and the degree of substitutability of workers at different ages. Simulations suggest that in a pure labor economy, the assumption of imperfect substitution of workers at different ages implies a dividend from workforce aging during the next decades. Workforce aging implies that the actual age distribution of the workforce can be expected to shift closer to the optimal age distribution generating a dividend in terms of aggregate productivity. Simulations suggest that the dividend is likely to be non-trivial in magnitude, although the size of the effect depends very much on the values of elasticities of substitution, about which little is known.