Tuesday, March 31, 2009

New paper: The Cost of Low Fertility in Europe

The National Bureau of Economic Research has released a new working paper, "The Cost of Low Fertility in Europe," by David E. Bloom, David Canning, G√ľnther Fink, and Jocelyn E. Finlay. Here's the abstract:

We analyze the effect of fertility on income per capita with a particular focus on the experience of Europe. For European countries with below-replacement fertility, the cost of continued low fertility will only be observed in the long run. We show that in the short run, a fall in the fertility rate will lower the youth dependency ratio and increase the working-age share, thus raising income per capita. In the long run, however, the burden of old-age dependency dominates the youth dependency decline, and continued low fertility will lead to small working-age shares in the absence of large migration inflows. We show that the currently very high working-age shares generated by the recent declines in fertility and migration inflows are not sustainable, and that significant drops in the relative size of the working-age population should be expected. Without substantial adjustments in labor force participation or migration policies, the potential negative repercussions on the European economy are large.

Put in English, here's roughly what it means: falling fertility first produces income gains, as the cost of supporting children declines, but later produces losses, as the smaller workforce has to support a relatively larger number of retirees.

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