Population Ageing and Structural Adjustment

Abstract

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 6-1 skill groups, 81 occupations and I06 industries.

The effects are modelled by comparing two economies: a base case in which population ageing takes place, and an alternative (coul1feJfactual) economy in which the age s1mcture of the population - insofar as it affects workforce participation rates and hours worked per week -remains unchanged. In the interests of transparency, the total effect of population ageing is decomposed into: a scale effect. a skill effect, a taste effect and a public effect.

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 base case (ageing) simulation from their values in the counterfactual (no ageing) simulation in the final year, i.e.. 202-1-25. 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 o_(1he analysis for economic policy.