China and Demography Transition Effects

the phenomenon of the labor shortage in eastern part of China and the increasing of the labor wages since 21th century has become a hot topic throughout China and it attracts a lot of debates among scholars on whether China has reached the Lewis turning point. The population aging and labor shortage phenomenon imply that China’s demographic dividend will soon be exhausted (Wang and Mason, 2004) and it will turn into a demographic deficit with important adverse economic consequences (Peng and Mai, 2008).

        These profound demographic changes are causing increasing concern about the sustainability of China’s economic growth (Cai, 2009; Cai and Wang, 2005). Scholars and Chinese government officials worry that the looming demographic challenge may undermine China’s ability to grow rich before its population grows old (Jackson and Howe, 2004).

relationship between demographic transition with economic growth and income distribution for developed economies since 1990s when the population aging emerged to influence the economic and society. Generally speaking, the literature indicates that the aging of the population generates negative economy-wide effects that would slow economic growth. As refer to the relationship between demographic transition and income distribution, the empirical results are inconclusive as there is evidence both supporting a positive and a negative relationship. As the issue of population aging began to unfold at the beginning of the 21st century for developing countries, existing studies on the relationship between demographic transition with economic and income distribution mainly focus on developed countries and only a few studies referred to developing countries.

2.1 The Effects of Demographic Transition with Economic Growth

The impact of any demographic change can be split into supply effects (consequences for labor and capital) and demand effects (consequences for public and private consumption, international trade and domestic and foreign investment) (Poot, 2008). Generally speaking, the population transitions have been known to generate negative economy-wide effects (Kim and Hewings et al., 2011). The negative effects of population ageing on economic growth are increasingly recognized (Peng, 2006; Golley and Tyers, 2006). Peng(2006)’s simulation results show that the labor force decline caused by population ageing will decelerate China’s economic growth rate by two percentage points annually during the 2020s and by three percentage points annually during the 2040s. Conclude from the literature review, the demographic transition would affect the economic growth via different routes: 1) the total labor supply and labor productivity growth; 2) the structure of household consumption and 3) the institution’s savings and investment behavior.

(1) The changes of production due to the reduction of total labor supply and modification of labor age structure. In one hand, the total labor supply as the factor input for production would be reduced with the population ageing that it have a negative impact on productive. In the other hand, the process of population ageing would change the age structure that influence the composition of the labor resource and thus the total factor productivity (TFP) would be modified accordingly. This is because of the different age groups would have different characteristics which would impact the work categories, the innovation, the cost of adopting new technology (OECD, 1998;Canton et al, 2002) that work on the TFP. What’s more, the population age would slow down structural adjustment due to the less labor mobility for aged people (Poot, 2008).

(2) The reduction of total household consumption and changes of household consumption structure. The population ageing may reduce the total consumption in one hand and change the 5

consumption structure on the other hand. Different age population would have different consumption propensity. For example, the population with high ratio of children dependent, the educational expenditure would be enhanced within household and the population with high ratio of old people, the expenditure on health care would be increased accordingly.

(3) The changes of social savings and investment. The population age would have a negative impact on saving and the related investment as well. First, the old population themselves would have a low saving rate as no labor-income for old population. They have to use their savings and this may increase the cost of capital and lower investment (Poot, 2008). Second, the families with old people would enhance the burden for the family’s labor force so that comparatively less saving would be accumulated. Third, the government would increase the transfer to the population pension for social security which would reduce the government saving correspondingly (Fu, 2012). And finally, foreign capital would flow to other countries because of the high cost of labor force which would rise significantly due to the population aging and labor shortage. Consequently, the reduction of savings and investment further increase uncertainties in capital accumulation in China, and destabilize economic growth (Li and Liu, et al, 2011).

However, there are also some researches claimed a different attitude that population ageing would have positive effect to productiveness. This can be account for the following reasons: 1) with the population transition, the senior labor force also increased, and an increasingly mature workforce will have higher levels of work experience and it may achieve higher levels of productivity than a younger workforce (Disney, 1996). 2) Population transition lead to less new born and young population, thus the education expenditure for young would fall and this may lead to subsequent productivity growth (Ermisch, 1995; Fougere and Merette, 1999). 3) The decrease of the labor force due to the population ageing cause a higher relative price of labor and therefore provides a greater incentive to innovate through capital investment or research and development.

2.2 The Effects of Demographic Transition with Income Distribution

With the deterioration of income inequality followed with the rapid economic growth and population aging, the researches on the population transition with income distribution became popular in the 1990s for developed countries. Moreover, the general trend of such researches regarding this relationship is inconclusive as there is evidence both supporting a positive and a negative relationship. In one hand, some empirical researches indicate that population aging worsen the income inequality (Ohtake and Saiyo, 1998; Deaton and Paxon, 1994). Deaton and Paxson (1995) analyze the relationship between population aging and inequality and conclude that population aging leads to greater inequality both for within-cohort inequality and between-cohort inequality. Their results fit the conditions of the Taiwanese economy and also predict increases in inequality in other fast-growing Asian countries. Followed by Deaton and Paxson (1995), Ohtake and Saito (1998) analyze how consumption inequality within a fixed cohort grows with age, using Japanese household micro data. Their results show that half of the rapid increase in the economy-wide consumption inequality during the 1980s was caused by population aging. Consumption inequality starts to increase at the age of 40 and younger generations face a more unequal distribution from the beginning of their life-cycle. Miyazawa (2005)’s analytical results reveal that the relationship between growth and inequality is at first positive and then may become negative as the population ages. However, on the other hand some studies find that aging may have a negligible effect inequality (Jantti, 1997; Bishop, Formby and Smith, 1997; Barrett, 6

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