Charting the Economic Life Cycle

The shape of the demographic life cycle is of fundamental interest, which demographers recognize through extensive efforts to estimate, describe and interpret the age-shapes of fertility, mortality, marriage, divorce, and migration. These age-shapes are influenced by biology, culture, economic constraints and individual choice. Similarly, the shape of the economic life cycle is of fundamental interest in its own right, and this shape is influenced by the same set of factors. Here we will be primarily concerned with the estimation and description of the basic economic life cycle, and some illustrative comparisons of how it differs across countries and over time within countries in recent years. Economic behavior over the life cycle can be summarized by the amount consumed at each age and by the amount produced through labor at each age. One sort of economic dependency occurs when consumption exceeds labor earnings, a condition that marks off periods in childhood and old age. From this point of view, an older person is economically dependent even if she has accumulated claims on output that more than offset her consumption, claims that could take the form of entitlements to transfers or ownership of assets. Often the economic lifecycle is treated in a highly stylized fashion. Dependency ratios and other similar age structure variables, for example, capture only the broadest features of the economic lifecycle, and quadratic functions smooth through important details of the age patterns. Our goal here is to measure it in comprehensive detail. However, we have not attempted to take time use into account, so such important issues as the time spent by parents caring for their children, or time spent caring for elderly relatives, are not covered here. Individual consumption or production by age are seldom calculated, because attention naturally turns toward more disaggregated measures such as wages, labor force participation rates, hours worked, or household expenditures. However, although per capita consumption and production may seem like crude measures, they summarize and incorporate the influences of many factors that may have contradictory or complementary effects on the economic life cycle. Demographic age profiles for fertility and mortality are of interest because they describe a basic aspect of human behavior. But they are also important because they can be applied to a population age distribution to calculate the number of births and deaths occurring in a period. Such a calculation requires the assumption, seldom made explicit, that variations in the population age distribution and in the age profiles of fertility and mortality, are independent. The Easterlin Hypothesis asserts the contrary: that an unusually large age group will experience unusually low fertility. Similarly, an unusually large share of young children in the population might, in some contexts, be expected to cause mortality of young children to be higher. The assumption of independence makes it possible to generate numbers, but various feedback processes render the calculations suspect. Concerns of the same sort arise when age schedules of consumption and production are applied to population age distributions to generate levels of aggregate consumption and labor earnings, which we will call expected consumption and expected labor earnings. When the population age distribution changes, it alters their relative size, as summarized by the ratio of expected earnings to expected consumption, called the support ratio.1 There has been recent interest in the demographic dividend, which occurs during a sustained period of improving support ratios during the demographic transition, and which is estimated using age profiles of per capita consumption and labor earnings of the sort described above. However, as with fertility and mortality, such calculations are undermined when there is feedback from the population age distribution to the age profiles of consumption and labor earning. For example, there is ample reason to expect an unusually large cohort to experience reduced earnings (Easterlin, 1978, and a large subsequent literature).2 Just as broad changes in aggregate economic dependency may be illuminated by age profiles of consumption and labor earnings in general, more specific consequences of changing population age distributions can be illuminated using per capita age profiles for more specific kinds of consumption, production, or other economic behaviors, but always in reference to population level age group averages rather than conditional on participation. Examples include the demand for housing (Mankiw and Weil, 1989; McFadden, 1994), stock market fluctuations (Poterba, 2004), saving rates (Modigliani, 1988; Mason, 1987, 1988; Cutler et al. 2001), interest rates, and impending fiscal problems (Lee and Edwards, 2001, 2002). As always, such disaggregation carries its own hazards, since there may be substitution across subcategories such as publicly provided health care or education, and private expenditures on these, and the overall patterns of change may be obscured. This paper will consider methodological issues in estimating the economic life cycle. It will then present cross-sectional estimates of consumption and labor earning for a number of countries, including some disaggregation into public and private, and a separate examination of expenditure on education. Next, we will consider how to interpret and explain the differences that are observed. Finally we will consider changes over time in the age profiles for Taiwan and the US since around 1980. The estimates presented here draw upon a number of studies that are being carried out as part of a larger study of the economic lifecycle and the reallocations systems - primarily through saving and public and familial transfers – that respond to the economic lifecycle. A system of accounts, called National Transfer Accounts, is being developed that is consistent with National Income and Product Accounts but provides much-needed age data. The methodology for constructing estimates is discussed briefly in this paper, but more detailed information will be available on the project website – www.ntaccounts.org. The researchers and a principle source for the estimates presented here are provided in the references section.