Population Change and Economic Growth - Research Paper Example

Summary based on the article: Population Change and Economic Growth: The Long-Term Outlook Frank T. Denton and Byron G. Spencer & University> I confirm that: "I have read this article thoroughly and my assignment is based on the above article" Mar 2009 Population Change and Economic Growth: The Long-Term Outlook Denton and Spencer have extensively studied the effect of population change and their derivative attributes, on the economic growth and GDP of Canada (2003). The highlights of their study have been briefly elucidated and presented in this summary report as follows: Assumptions and the governing correlation equation between GDP and demographic parameters Source of historical data and trends GDP forecast up to the year 2051 based on different demographic assumptions: a. Scenario 1: Status-quo on existing trends extrapolated into future b. Scenario 2: Increased fertility rate c. Scenario 3: Decreased mortality rate d. Scenario 4: Increased labor force participation rate e. Scenario 5: Increased immigration f. Scenario 6: Decreased immigration g. Scenario 7: Increased productivity growth h. Scenario 8: Combination of scenarios 2 to 7. Conclusions Summary Report Assumptions and governing correlating equation between GDP and demographic parameters GDP is projected as a function of: total population (POP) labor force source population (SPOP) which depends upon the attainment of prescribed working age, and therefore, is a proportion of total population (SPOP/POP) labor force component (LF) which depends upon labor participation rate, and represents a proportion of labor force source population (LF/SPOP) number of persons employed (EMP) which depends upon employment rate, and represents a proportion of labor force component (EMP/LF) Productivity, represent as output per person employed, contributing to GDP. This is indicated as (GDP/EMP). It should also be noted that output per person employed depends on a number of factors, such as, capital/labor ratio, returns to scale, state of technical progress, proportions of high and low productivity industries in aggregate output, average hours worked and the educational and skill composition of the work force. The governing identity has thus been cast as: The instantaneous rate of growth of GDP is expressed as the sum of rates of growth of variables on the right hand side of the above equation; hence, logarithms are introduced in the equation. The rate of GDP per capita is thus expressed as: To a close approximation, the above equation holds if the log differences are replaced by annual percentage rates of change. Source of historical data and trends The base data for the study are taken from Statistics Canada National Income and Expenditure Accounts for GDP (available from 1961), and the population series from the Statcan (available from 1971). Both data series have been extended backwards from 1951 using "old-onto-new" splicing. The labor force source population, as defined in the labor force survey, is the non-institutional population of 15 years of age, or older. Based on the growth rate equation defined above, the data for half a century has been generated for historical analysis, and with which forecasts have been compared. Historical trends indicate that GDP growth rate was highest in 1960s touching 5.2%, and lowest in 1980s at 2.33%. The study forecasted GDP for 2001-2011 as 2.52, which is quite near to the actual of 2.7%, as reported in the World Fact Book for Canada (2008). A high GDP growth rate in 1960s is explained by the fact that baby boomers along with augmented female participation added to the workforce. During 1980s it is worth noting that both the labor workforce and employment rate declined. It is also of interest to note that the population growth along with labor force source population continued to decline since 1950s. By 1980s, the inflow of younger people joining the labor workforce and the participation rate of older people declined. The net immigration however offsets, adding part component to the labor workforce. The 1990s witnessed some degree of turnaround: the rate of productivity growth rose, and there was an increase in the employment rate. The correlation model reasonably explains the trends in population change and economic growth. Scenario 1: Status-quo on existing trends extrapolated into future Status-quo connotes the following assumptions: Fertility rate remains the same as in year 2000 at 1.49% Mortality rate continues to fall at a moderate pace, producing increase in life expectancy rates Immigration remains at 230,000 per year Labor force participation rate remains at 2002 level Unemployment rate held constant at 7.5% Labor productivity at 1.61% (1991-2001 level) Implications: Population growth will see a decreasing trend and stop altogether around mid-century Labor workforce would decline, by 2011-21 reach zero, and then become negative. This would show as a shift in age distribution of adult population towards the retirement end. In other words, the average age of the labor workforce would increase. Immigration to an extent can offset this decline (GDP/POP) will decrease from 1.8% in 2001-11 to 1.1% in 2011-32 and subsequently will rise to 1.4%. This rise can be explained by a stoppage of population growth during that period with productivity remaining constant (assumed, and indeed is a wildcard) Immigration is another wildcard in forecasting. It is a significant controller for affecting population and labor force growth, and an important policy instrument of the Government. Under the assumptions made, immigration accounts for half of the increase in labor force in the current decade, and would be the only source of labor force growth in the next one. Thereafter, even with assumed immigration influx of 230,000 people, labor force is set to decline Scenario 2: Increased fertility rate Assumption: Fertility rate increases by 50% from 1.49 children per woman in 2001 to 2.33 in 2011, linearly interpolated in the period. Implications: With respect to scenario 1, higher fertility rate would increase POP by 0.59% in 2031-41 and 0.73% in 2041-51. However, the effects on labor force would become discernible only in 2021-31 (recall that working population was defined as 15 years of age and above) showing an increase from status-quo scenario by 0.74% and 0.84% in 2031-41 and 2041-51. The growth rate of GDP is also affected in similar manner GDP/POP growth rate however falls for next two decades, because babies born are yet to join the labor workforce. In subsequent decades the increase in growth rate is however, marginal Scenario 3: Decreased mortality rate Decreased mortality rate has the effect of increasing life expectancy by 2.2 years and 2.7 years to male and female populations respectively. The effects in POP growth rate are minimal in subsequent decades, 0.03% in 2041-51. However, with respect to scenario 2, the GDP/POP has negligible effect, in fact, a decreasing one. Scenario 4: Increased labor force participation rate Assumptions: Labor participation rate for those above 20 years of age would rise to 1971 level Labor participation rate for females will converge with male rates in every group by 2011 Labor participation rate will remain constant in subsequent decades Implications: Decade 2001-11 would see remarkable rise in labor force at 1.7% annually. GDP and (GDP/POP) would rise to 4.24% and 3.49% respectively Continued large increases in participation cannot be sustained, and therefore GDP and (GDP/POP) show no significant rise, merely reflecting changes in population age distribution, when labor participation rate was held constant (see assumption above) Scenario 5: Increased immigration Assumptions: 50% increase in annual immigration beginning 2003-04, that is, 345,000 immigrants annually. Implications: Both labor force and GDP growth rates increase identically by 0.31%. The largest impact is felt in 2011-21. However, this impact recedes in favor of scenario 2 in 2021-31 due to delayed effects of fertility rate on LF and POP. The effect on labor force growth rate is however smaller when compared to scenario 4 by 1.4%. Scenario 6: Decreased immigration The annual number of emigrants is reduced by 50% to 35,000 and is sustained at this level throughout the forecast period. The effects on the growth rates of population, labor force, and GDP remain at less than an eighth of a percentage point and the effects on GDP per capita are virtually zero. Scenario 7: Increased productivity growth Labor productivity has been increased by 50% over the base figure of 1991-01, at 2.4%. Substantial increase accrue in rates of growth of GDP and (GDP/POP), adding 4/5 of a percentage point in every decade, when compared to scenario 1. It may also be noted that the effect on the growth rate on GDP per capita is greater than the effects of any other factors with the exception of scenario 4 in the period 2001-11. Scenario 8: Combination of scenarios 2 to 7 Combining the scenarios 2-7, following trends emerge: GDP growth at 5.4% per year is just above the growth rate of 5.3% recorded in 1961-71. The reasons for such an increase in growth rate is due to: (a) assumed large increase in labor force; (b) increased productivity (c) higher immigration influx. Although GDP growth rate falls to 3.21% in 2011-21, it is well above the scenario-1 growth rate of 1.66%. The GDP growth rate continues to rise in the succeeding decades as higher fertility rates show their effect. The (GDP/POP) grows at an annual rate of 4.0 percent in 2001-11. This is well above the growth rated recorded in the past 5 decades. Increased participation rate and productivity has as effect of increasing the numerator i.e. GDP, without altering POP. The strategy shown in this combined scenario works best amongst the alternatives analyzed. Conclusion Following are the salient conclusions from the paper reviewed in this summary report: Increased labor force participation rates could offset slower growth in working age population. Higher levels of immigration would continue to have a significant effect on GDP growth rate Increase in fertility rates would have attendant impact in GDP growth rate in succeeding decades after 2021 With increased labor force participation rates, GDP growth rate can further be enhanced with productivity gains. References Denton, Frank, & Spencer, Byron (2003). Population Change and Economic Growth: The Long-Term Outlook. SEDAP Research Paper No. 102 Eagles, Brock (2008). The World Factbook, website: http://www.brockisd.net/Bouyer/atlas/factbook/print/ca.html Statistic Canada (2008). National Income and Expenditure Accounts, website: www.statcan.gc.ca, Record Number: 1901 Read More