1.5 An increased population scenario in Western Europe
1.5.1 Capital mobility versus no capital mobility
Under our framework, capital is mobile between regions up to a region specific confiscation rate on the returns to capital (π). In the following analysis we com-
pare the effects of an increased population in Western Europe under the MONAL- ISA framework, labeled ‘open economy’, and under no capital mobility, labeled ‘closed economy’. We show that the increased population scenario yields distinct outcomes whether performed in a closed or open economy setting. This confirm the findings of Aglietta et al. (2007) despite the fact that the scenarios they con- sidered are linked to pension reforms. Lastly we also show that consequences on world variables (world GDP and interest rate) may differ depending on the region in which the population increases.
Increased population will lead to a rise in the labor force. Since compared to the baseline the additional-born individuals of 2010 spend time education in their first period of life, the growth rate in the labor force will be highest in 2020 when they fully add to the labor force (figure 1.13.a). From 2030 to 2070, the labor force still continues to increase but at a lower pace.
This boost in the labor force will reduce the capital to labor ratio and raise the marginal productivity of capital. The Western European interest rate will increase under the two frameworks, as shown in figure 1.13.c. Under the MONALISA framework, capital markets are fully integrated and the interest rate of Western Europe is equal to the world interest rate. The effects of an increased labor force are diluted on the international capital market and the interest rate reacts less than
Figure 1.13: Impact of an increased population scenario
a. Annual growth rate of the workforce b. Annual growth rate in GNI (% change)
c. Annual interest rate (% deviation) d. Wage rate (% change)
Figure 1.14: Impact on consumption profiles (% change from the baseline)
a. High-skilled aged 15-34 b. Low-skilled aged 15-34
c. High-skilled aged 35-64 d. Low-skilled aged 35-64
in the closed economy framework. In a closed economy, the effects of a rising la- bor force are totally absorbed on the regional capital market inducing an increase in the interest rate of 1.13 percentage points in 2020.11 After 2030, the augmenta- tion in the interest rate decelerates and, in the closed economy setting, the interest rate is even reduced compared to the baseline. The reasons are that the growth in the labor force slows down after 2020 and that the additional individuals start to retire after 2050. From 2070 onwards, the population structure stabilizes. In the closed economy, the interest rate goes go back to its baseline value and there will be no change in the long run, since the increased population scenario leads simply to a rescaling of the Western European economy. In the open economy setting, the scenario has a long term impact. Since population is increased in the long term in Western European there will be a higher labor force in a relatively more productive region. A higher long term interest rate is established because re- gions are interdependent and differ in terms of demography, productivity, pension systems, skills.
Compared to the interest rate, the impact on the wage is reversed (figure 1.13.d).12 The increase in the workforce leads to a higher saving rate and thus to a higher investment-to-GDP ratio (figures 1.13.e and 1.13.f). In a closed econ- omy framework, the higher demand for capital is provided by domestic savings. In the fully integrated world, the changes in the saving and investment rates are not symmetric. In the first decades of the 21stcentury, the rise in the labor force of Western Europe leads to capital inflows and to strong increase in the investment rate. Since the interest rate increases less than in the closed economy setting, the change in the domestic saving rate is relatively small.13 This implies a reduction
in the current account balance compared to the baseline. The situation is reversed after 2040 when the increase in the saving rate is more marked than the one in the investment rate (leading to an improvement in the current account compared to the baseline). From this period onwards, the increase in the saving rate is also higher than in the closed economy case because of a higher the interest rate.
The impact on the GNI growth rate is similar under both frameworks figure 1.13.b. In fact, in the closed economy the rise in the labor force leads to higher rise in the interest rate than in an open economy but to also to a higher decrease in wages. Thus changes in the prices of inputs compensate each other.
However, this diverse impact on the returns to production inputs under the two frameworks will affect in a distinct way the consumption profiles of the var- ious age groups (figure 1.14). Let us first notice that average consumption is
11The annual interest rate is 5.11% compared to 3.98% in the baseline in 2020.
12In the current version of the model, high- and low-skill labor are perfect substitutes and
moreover the skill premium is held constant (see sections 1.2.4 and 1.3.2).
13The saving rate even decreases in 2010 because the population increase is due to individuals
increased in general for every cohort. In the closed economy framework, average consumption of the different age groups is enhanced with a maximum in 2050. The consumption of the younger cohorts (i.e. the 15-34 years old) is however decreased in 2010 (figures 1.14.a and 1.14.b). These individuals have few assets and do not benefit from the higher interest rate, but suffer from the drop in the wage rate. This also explains the downward peak in the increase in their con- sumption in 2030 when these individuals are 35-64 years old (figures 1.14.c and 1.14.d). At the time of the introduction of the 100 million additional individuals in 2010, the individuals benefiting most are the pensioners, since they see their wealth enhanced by the higher interest rate (figures 1.14.e and 1.14.f).
In contrast to the closed economy setting, the maximum in the average con- sumption of the different age groups arises at different moments in time in the open economy framework: the highest increases in consumption happen in 2030 for the 15-34 years old, in 2050 for the 35-64 years old and in 2080 for the +65 years old. This means that the individuals benefiting most from the population in- crease belong to the same cohort, i.e. the one born around 2030. This corresponds to the period where the fiscal effect is largest: the number of contributors is con- siderably enhanced while the replacement rates and the number of pensioners are constant at the baseline level. In fact, in the fully integrated world, changes in the returns to production inputs play a smaller role that in the closed economy setting and the main force explaining the changes in consumption profiles is the fiscal effect. Nevertheless, as in the closed economy case, the variation in consumption of the cohort born at the time of the “arrival” of the 100 million indivuduals in 2010 experiences a downward peak. Again this can be explained by a lower wage rate for this cohort and which leads to lower asset accumulation than cohort born before or after 2010.