Integrating demography into a regional CGE model

Changes in global labor shares are often exogenously linked to changes in global population in (recursive) dynamic general equilibrium models (CGE). In many cases, these models carry a simplification or even misspecification for e.g. demographic behavior concerning fertility and mortality, and with that of the changing age structure of the population. In addition, participation rates of the potential labor force should be taken into account to have a better representation of the actual labor force. To account for these factors we link a recursive dynamic global CGE model, based on the GTAP 6.0 database, with a model that describes the demographic changes as the result of fertility and mortality patterns. The results indicate that the population aging has a substantial effect on the economy. Especially in Europe, where the process of aging is or will become visible within the coming decades, economic growth might be slowed down. To anticipate on these developments, various policy options are explored. The policies included in the paper are rising retirement age, increasing participation rates and changing the fertility rates. Although these options do have a significant positive effect on the average income levels, they cannot fully compensate the coming waves of aging.