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The Role of Endogenous Skill Choice in an Aging Society

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abstract This paper analyzes the effects of an aging population on individual skill choices and the production structure by means of a dynamic general equilibrium model with overlapping generations and probabilistic aging. The model allows for capital-skill complementarity, which strongly affects the outcomes in a small open economy setting vs. a closed (or equivalently worldwide) economy. In an open economy with a fixed real interest rate, the necessary increase in the contribution rate discourages labor supply and depresses GDP. With a variable real interest rate, however, capital usage increases and - by the capital-skill complementarity - also employment of high skilled labor. The mobilization of highly productive labor gives a boost to GDP. Hence, the often cited adverse effects of aging are mitigated and can be overcome when taking into account a more realistic production structure.
   
type discussion paper (English)
   
keywords Skills, Human Capital, Aging, Demographics, Education, Capital-Skill Complementarity, Life-Cycle
   
project Education, Training, and Labor Market Search
date of appearance 25-5-2005
page(s) 25
review not reviewed
   
citation Jaag, C. (2005). The Role of Endogenous Skill Choice in an Aging Society.