This paper analyzes effects of population aging on
the labor market and determines their broad
implications for public policy. It takes Germany as an
example, but it equally applies to the other large
economies in Continental Europe. The pape
r argues that, alongside the amply discussed,
demographically-determined increase in the contribu
tion and tax burden which
is responsible for the
ever widening gap between gross and disposable ear
nings, two other important areas of policy deserve
greater attention. First, it is unlikely that the d
ecline in the relative size of the economically active
population will be offset by higher capital intensity.
Labor productivity will need to increase over and
above this mechanism in order to compensate
for the impact of population aging on domestic
production. Hence, we will need more education and training to speed up human capital formation.
Second, the shift in the age structure will also cha
nge the structure of demand for goods. This, in turn,
will have large effects on the pattern of employme
nt across different sectors of the economy and will
require a substantial increase in labor mobility in
order to accommodate these structural changes.
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