Ms. Andrea De Michelis, Mr. Marcello M. Estevão, and Ms. Beth Anne Wilson
Traditionally, shocks to total factor productivity (TFP) are considered exogenous and the employment response depends on their effect on aggregate demand. We raise the possibility that in response to labor supply shocks firms adjust efficiency, rendering TFP endogenous to firms’ production decisions. We present robust cross-country evidence of a strong negative correlation between growth in TFP and labor inputs over the medium to long run. In addition, when using instruments to capture changes in hours worked that are independent of TFP shocks, we find that cross-country increases in labor input cause reductions in TFP growth. These results have important policy implications, including that low productivity growth in some countries may partly be a side effect of strong labor market performance. By the same token, countries facing a declining workforce, say, because of aging, may see accelerating TFP as firms find better ways of employing workers.
Abstract Empirical evidence is mounting that, in advanced economies, changes in monetary policy have a more benign impact on the economy—given better anchored inflation expectations and inflation being less responsive to variation in unemployment—compared to the past. We examine another aspect that could explain this empirical finding, namely the demographic shift to an older society. The paper first clarifies potential transmission channels that could explain why monetary policy effectiveness may moderate in graying societies. It then uses Bayesian estimation techniques for the U.S., Canada, Japan, U.K., and Germany to confirm a weakening of monetary policy effectiveness over time with regards to unemployment and inflation. After proving the existence of a panel co-integration relationship between ageing and a weakening of monetary policy, the study uses dynamic panel OLS techniques to attribute this weakening of monetary policy effectiveness to demographic changes. The paper concludes with policy implications.
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Mr. Benedict J. Clements, Mr. Kamil Dybczak, Vitor Gaspar, Mr. Sanjeev Gupta, and Mauricio Soto
This Staff Discussion Note looks at the stark fiscal challenges posed by the decline and aging of populations between now and 2100. It finds that without reforms, pensions and health spending would rise to 25 percent of GDP by end-century in more developed countries (and 16 percent of GDP in less developed countries), with potentially dire fiscal consequences. Given the uncertainty underlying the population projections and associated large fiscal risks, a multi-pronged approach will be required. This could include entitlement reform—starting now but at a gradual pace; policies that affect demographics and labor markets; and better tax systems and more efficient public expenditure.