Will China Eat Our Lunch or Take us to Dinner? - Simulating the Transition Paths of the U.S., Eu, Japan and China

This paper develops a dynamic, life-cycle, general equilibrium model to study the interdependent demographic, fiscal, and economic transition paths of China, Japan, the U.S.,and the EU. Each of these countries/regions is entering a period of rapid and significant aging that will require major fiscal adjustments. But the aging of these societies may be a cloud with a silver lining coming, in this case, in the form of capital deepening that will raise real wages. In a previous model that excluded China we predicted that tax hikes needed to pay benefits along the developed world’s demographic transition would lead to a major capital shortage, reducing real wages per unit of human capital over time by one fifth. A recalibration of our original model that treats government purchases of capital goods as investment rather than current consumption suggests this concern was overstated. With government investment included, we find much less crowding out over the course of the century and only a 4 percent long-run decline in real wages. Adding China to the model further alters, indeed, dramatically alters, the model’s predictions. Even though China is aging rapidly, its saving behavior, growth rate, and fiscal policies are currently very different from those of developed countries. If successive cohorts of Chinese continue to save like current cohorts, if the Chinese government can restrain growth in expenditures, and if Chinese technology and education levels ultimately catch up with those of the West and Japan, the model’s long run looks much brighter. China eventually becomes the world’s saver and, thereby, the developed world’s savoir with respect to its long-run supply of capital and long-run general equilibrium prospects. And, rather than seeing the real wage per unit of human capital fall, the West and Japan see it rise by one fifth percent by 2030 and by three fifths by 2100. These wage increases are over and above those associated with technical progress, which we model as increasing the human capital endowments of successive cohorts. Even if the Chinese saving behavior (captured by its time preference rate) gradually approaches that of Americans, developed world real wages per unit of human capital are roughly 17 percent higher in 2030 and 4 percent higher at the end of the century. Without China they’d be only 2 percent higher in 2030 and, as mentioned, 4 percent lower at Century’s end. What’s more, the major short-run outflow of the developed world’s capital to China predicted by our model does not come at the cost of lower wages in the developed world. The reason is that the knowledge that their future wages will be higher (thanks to China’s future capital accumulation) leads our model’s workers to cut back on their current labor supply. So the shortrun outflow of capital to China is met with a commensurate short-run reduction in developed world labor supply, leaving the short-run ratio of physical capital to human capital, on which wages positively depend, actually somewhat higher than would otherwise be the case. Our model does not capture the endogenous determination of skill premiums studied by Heckman and Taber (1996). Doing so could well show that trade with China, at least in the short run, explains much of the relative decline in the wages of low-skilled workers in the developed world. Hence, we don’t mean to suggest here that all US, EU, and Japanese workers are being helped by trade with China, but rather that trade with China is, on average, raising the wages of developed world workers and will continue to do so. The notion that China, India, and other developing countries will alleviate the developed world’s demographic problems has been stressed by Siegel (2005). Our paper, although it includes only one developing country – China – supports Siegel’s optimistic long-term macroeconomic view. On the other hand, our findings about the developed world’s fiscal condition are quite troubling. Even under the most favorable macroeconomic scenario, tax rates will rise dramatically over time in the developed world to pay baby boomers their government-promised pension and health benefits. As Argentina has so recently shown, countries can grow quite well for years even with unsustainable fiscal policies. But if they wait too long to address those policies, the financial markets will do it for them, with often quite ruinous consequences.

Dynamic Globalization and its Potentially Alarming Prospects for Low-Wage Workers

Will incomes of low and high skilled workers continue to diverge? Yes says our paper's dynamic, six-good, five-region - U.S., Europe, N.E. Asia (Japan, Korea, Taiwan, Hong Kong), China, and India -, general equilibrium, life-cycle model. The model predicts a near doubling of the ratio of high- to low-skilled wages over the century. Increasing wage inequality arises from a traditional source - a rising worldwide relative supply of unskilled labor, reflecting Chinese and Indian productivity improvements. But China's and India's education policies matter. If successive Chinese and Indian cohorts become more skilled, major exacerbation of inequality will be precluded.Demographic transition, overlapping generations (OLG), computable general equilibrium models (CGE)

A simulation model for the demographic transition in the OECD: Data requirements, model structure and calibration

The developed world stands at the fore of a phenomenal demographic transition. Over the next 30 years the number of elderly in the OECD countries will more than double. At the same time, the number of workers available to pay the elderly their government-guaranteed pension and health care benefits will rise by less than 10 percent. These two demographic trends are expected to put enormous pressure on social security systems and government expenses. To address the consequences of the aging process, this paper develops a dynamic, intergenerational, and interregional demographic life-cycle model. The model has three regions - the U.S., the EU and Japan - which exchange goods and capital. The model features immigration, age-specific fertility, life span extension, life span uncertainty, bequests arising from incomplete annuitization, and intra-cohort heterogeneity. After introducing the theoretical model, we simulate the transition path for the three considered regions keeping current immigration constant, assuming the projected increase in life expectancy and the continuation of current social security and health care policies. --Demographic transition,overlapping generations (OLG),computable general equilibrium models (CGE)

Generational accounting in general equilibrium

This paper shows how changes in generational accounts relate to the generational incidence of fiscal policy. To illustrate the relationship, it uses the Auerbach-Kotlikoff Dynamic Life-Cycle Simulation Model to compare policy-induced changes in generational accounts with actual changes in generations' utilities. The paper considers a wide ränge of policies in closed and small open economies as well as economies with and without capital adjustment costs. In general, changes in generational accounts appear to provide fairly good approximations to generations' actual changes in utilities. The approximations are better for living generations. They are worse for policies that involve significant changes in the degree of tax progessivity and for economies with sizable capital adjustment costs. Finally, generational accounting needs to be adjusted in the case of small open economies to take into account the fact that the incidence of corporate taxation is on labor. The method of adjustment is simply to allocate changes in corporate tax revenues to generations in proportion to their changes in labor supply

A consistent extension of the lambda-calculus as a base for functional programming languages

Church's lambda-calculus is modified by introducing a new mechanism, the lambda-bar operator #, which neutralizes the effect of one preceding lambda binding. This operator can be used in such a way that renaming of bound variables in any reduction sequence can be avoided, with the effect that efficient interpreters with comparatively simple machine organization can be designed. It is shown that any semantic model of the pure λ-calculus also serves as a model of this modified reduction calculus, which guarantees smooth semantic theories. The Berkling Reduction Language (BRL) is a new functional programming language based upon this modification

Monitoring and Pay: An Experiment on Employee Performance under Endogenous Supervision

We present an experimental test of a shirking model where monitoring intensity is endogenous and effort a continuous variable. Wage level, monitoring intensity and consequently the desired enforceable effort level are jointly determined by the maximization problem of the firm. As a result, monitoring and pay should be complements. In our experiment, between and within treatment variation is qualitatively in line with the normative predictions of the model under standard assumptions. Yet, we also find evidence for reciprocal behavior. Our data analysis shows, however, that it does not pay for the employer to solely rely on the reciprocity of employees