Population Ageing and Labour Markets: Synthesizing Macroeconomic Accounts and Individual Behavior in an Economic-Demographic Growth Model

A macroeconomic-demographic growth model developed at IIASA extends the Blanchet-Kessler model by treating population in single-year age groups and adding modules covering pensions, health, and long-term care. This model has been used for, among other things, an extended analysis of the impacts of current and alternative demographic trends on the Japanese economy in a linked, globally consistent frame-work. A major weakness of the model in its present form is that the treatment of labor force is rudimentary. New research is adding a micro-simulation component that can be used to model labor market behaviors (entry to and exit from the labor force and human capital formation) endogenously, as well as closely related demographic behaviors (fertility, mortality/morbidity, migration, and household formation). These micro-level behaviors simultaneously determine macroeconomic variables (for example, the size of the labor force depends on the aggregation of individual decisions) and are influenced by them (for example, individual labor supply behavior depends on the average wage rate). In this paper, we present a prototype "MicroSSR" model which combines micro-simulation of fertility and human capital formation and a reduced version of the full macroeconomic model. Illustrative simulation results are shown and directions for future work are discussed. The paper is organized in two parts, the first describing the macro-model, the second the microsimulation extensions as currently developed.