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Population ageing and structural adjustment

3 Feb 2009

The future effects of population ageing on the Australian economy have been widely canvassed in recent years, most notably in the two Intergenerational Reports produced by the Australian Treasury and in the Economic Implications of an Ageing Australia report produced by the Productivity Commission. These reports are mainly concerned with the effect of ageing on the government's budgetary position. On the income side, they focus on how ageing affects labour supply and gross domestic product. On the expenditure side, they focus on how ageing affects various spending categories including education, health and aged care.

This paper provides a complementary analysis in that it considers how the structure of the economy is likely to be affected by these influences. In particular, it analyses the effects on 64 skill groups, 81 occupations and 106 industries of:

• a scale effect due to age-related shifts in total hours of employment (with the skill composition of employment unchanged).

• a skill effect due to age-related shifts in hours of employment distinguished by skill (with total hours of employment unchanged),

• a taste effect due to age-related shifts in the commodity composition of household final consumption, and

• a public effect due to age-related shifts in government final consumption.

The simulations are conducted using the MONASH applied general equilibrium model of the Australian economy. They generate results for each year from 2004-05 to 2024-25, but the analysis concentrates on explaining the deviations in the levels of selected variables in the basecase (ageing) simulation from their values in the counterfactual (no ageing) simulation in the final year, i.e., 2024-25. Results are reported separately for each of the four effects and for all four taken together (the total effect).

The paper pays particular attention to the implications of the analysis for economic policy.

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