Introductory Module to Economics of Ageing
Gentle Introduction to Economics
Economic Research Institute of Northern Ireland
Jose Luis Iparraguirre
March 2010
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The purpose of studying economics is not to acquire a set of
ready-made answers to economic questions, but to learn how
to avoid being deceived by economists.
Joan Robinson, 1955
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Outline
1
Definition of Economics
2
Branches of Economics
3
Topics in Economics of Ageing
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Definition of Economics
Some (alternative) definitions of economics from well-known textbooks:
The study of mankind in the ordinary business of life; it examines that part of individual and social action which is more
closely connected with the attainment and with the use of the material requisites of wellbeing... Thus it is on the one side
a study of wealth; and on the other, and more important side, a part of the study of man. (A. Marshall, 1890)
By economic activities are meant those human activities that direct themselves towards the creation, appropriation, and
accumulation of wealth... Economics is a body of doctrine relation to economic phenomena in the above sense. (J. N.
Keynes, 1890)
The study of human behaviour as a relationship between ends and scarce means which have alternative uses. (L.
Robbins, 1936)
The study of the principles governing the allocation of scarce resources among competing ends when the objective of the
allocation is to maximise the attainment of the ends. (G. Stigler, 1942)
The study of the whole system of exchange relationships. (J. Buchanan, 1962)
The study of the allocation of scarce means to satisfy competing ends. (G. Becker, 1971)
The study of how people and society end up choosing, with or without the use of money, to employ scarce productive
resources that could have alternative uses, to produce various commodities and distribute them for consumption, now or
in the future, among various persons and groups in society. (P. Samuelson, 1976)
The study of how society manages its scarce resources (G. Mankiw, 2001)
The study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social
customs, and political realities of the society. (D. Colander, 2006)
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Definition of Economics
Towards a definition of Economics of Ageing
Economics of Ageing studies the implications of individual and
population ageing on economic matters.
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Branches of Economics
Branches of Economics
Microeconomics - The study of economic agents
Consumption
Production
Markets
Distribution (Wages, Rents, Interests, etc)
Macroeconomics - The study of economic aggregates
Money and Credit
Economic Systems
International Economy
Economic Cycles
Economic Growth
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Branches of Economics
A distinction worth keeping in mind
Positive economics: description and explanation. Attempts to
what people do.
Normative economics: value judgments. Prescribes what people
should do.
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Branches of Economics
Two approaches of particular relevance
Capabilities approach: positive freedom to choose amongst
substantive opportunities
Behavioural economics: study of joint influences of psychology
and economics on behaviour.
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Branches of Economics
Economics and Information
Perfect information means that households possess knowledge of the
qualities and prices of everything available in the market and firms know all
that there is to know about wage rates, capital costs, and output prices (Case
and Fair, 2004).
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Branches of Economics
Economics and Information
Information may be imperfect due to several reasons.
The most important source of information imperfection regarding the
economics of ageing is information asymmetry
Information asymmetry occurs when one agent knows something that
another agent does not. There are two types of asymmetric information:
Moral hazard, when information about certain actions is hidden from
one party. In particular, when an agent would behave differently if
insulated from risk than if fully exposed to risk
Adverse selection, when knowledge about certain characteristics is
hidden from one party. In particular, when insurers cannot know the
risks associated to each agent and set premiums based on averages,
and consequently agents with higher risks buy more cover.
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Topics in Economics of Ageing
Some population projections
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Topics in Economics of Ageing
Some population projections
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Gentle Introduction to Economics
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Topics in Economics of Ageing
Some population projections
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Topics in Economics of Ageing
Some population projections
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Topics in Economics of Ageing
Some population projections (and its consequences)
Economic growth will depend less and less on labour force size and
growth and more and more on productivity growth
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Topics in Economics of Ageing
Supply and Demand and all that
Standard mainstream theory:
The higher the price of a product, the more a supplier is willing to
provide of it.
The higher the price of a product, the less a consumer is willing to
demand of it.
The price of the product and the quantity which is traded will be
determined where demand and supply meet are equal.
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Topics in Economics of Ageing
Supply and Demand and all that
If supply increases, the price will fall and the quantity traded will
increase.
If demand increases, the price will increase and the quantity traded will
increase
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Topics in Economics of Ageing
Supply and Demand and all that
Therefore, we need to distinguish between a change in the quantity
demanded or supplied and a change in the demand or supply.
If a price of a product falls, the quantity demanded will tend to increase.
If the demand of a product increases, its price will tend to increase too.
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Topics in Economics of Ageing
Supply and Demand and all that
Supply may shift as a consequence of changes in:
Competition
Cost of production
Technology
Price of other goods
Demand may shift as a consequence of changes in:
Income
Preferences
Price of related goods
Numbers of consumers
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Topics in Economics of Ageing
Consumption and Age
Opportunities and challenges of ageing: Economic analysis. V. Pryce, February 2010
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Topics in Economics of Ageing
Consumption and Age
Opportunities and challenges of ageing: Economic analysis. V. Pryce, February 2010
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Topics in Economics of Ageing
Opportunity cost
Opportunity cost is the gain or benefit we forego because we do
something instead of something else.
For example, the opportunity cost of investing in, say, shares of
Company X instead of Company Y
But also the opportunity cost of leisure (we could be earning some
money if doing a paid job at that same time).
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Topics in Economics of Ageing
Opportunity cost and caring
Carer time has been valued in the literature in three main ways:
Replacement cost: in the absence of the caregiver, the services
provided by carers would have to be paid for by the state or hired
through the market. Useful as a proxy for the costs that would fall on the
state if carers were absent from the care process.
Transfer payment cost: caring is valued on the basis of what the state
pays carers. Underestimates the overall cost to a carer, because it does
not account for opportunity costs.
Opportunity cost: the approach favoured by economists because it
attempts to place a monetary value on the alternative use of carer time.
Different values are assigned to caring depending on whether the
alternative use of time spent caring is paid employment or leisure time
forgone. Work time is valued on the basis of what the carer might earn in
the labour market if not involved in caring -depending on age, education
and previous work experience.
Source: Costs and consequences for the carers of people with dementia in Ireland. O’Shea, 2003.
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Topics in Economics of Ageing
Elasticity
If the price of a product goes up (down), the quantity demanded goes
down (up) and the quantity supplied goes up (down).
But, by how much?
The (price)-elasticity of a product shows that in percentage terms.
The demand for some goods or services is elastic -that is, if the
price goes, say, up, the quantity demanded is substantially
reduced in percentage terms.
The demand for some goods or services is inelastic, in the sense
that if the price varies, the quantity demanded does not change as
much as the price in percentage terms
The supply can also be elastic or inelastic.
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Topics in Economics of Ageing
Elasticity
As we saw earlier, the demand can change due to changes in
consumers’ income.
We can estimate the income-elasticity of a product -that is, by how
much its demand changes if or when the income of its existing or
potential consumers changes.
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Topics in Economics of Ageing
Elasticity
The price elasticity of demand for pharmaceuticals amongst high
income older people in Australia has been estimated at -0.1. (Siminski,
2008)
That is, if prices go up by 5%, the quantity demanded will contract by
0.5 %. Hence, it is inelastic
A study on tobacco consumption in the USA found that for 18-24 year
olds the price elasticity of demand was -0.58 whereas for the over 40s
it was -0.10. (Farrelly and Bray, 1998)
Therefore, a 20% increase in the price of tobacco will reduce the
quantity demanded by 18-24 year olds by 11.6% and the quantity
demanded by those over 40s by only 2%.
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Topics in Economics of Ageing
Elasticity
Income elasticity (IE) of demand tends to change over the life cycle
A study on consumption patterns by age group in Japan found that:
IE of food: under 29 = -2.3%; over 60 = -0.77%
IE of leisure: under 29 = +1.26%; over 60 = +2.25%
IE of transport: under 29 = +14.7%; over 60 = +3.5%
IE of clothing: under 29 = -2.3%; over 60 = +1.2% (notice the
different signs)
IE of energy: under 29 = -1.5%; over 60 = -0.5%
Life cycle changes in consumption behavior: age-specific and regional variations.Wakabayashi and Hewings, 2002.
Regional Economics Applications Laboratory.
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Topics in Economics of Ageing
Income and Substitution Effects
Substitution effect: because a return to work ultimately
means sacrificing benefits ... recipients face a financial
incentive to remain non-employed
Income effect: given the transfer payments and in-kind
services... many beneficiaries may prefer leisure to labor -or,
more precisely, an early retirement- even if work is not
implicitly taxed.
[E]conomists have typically regarded the substantial
reductions in labor force participation associated with receipt
of disability benefits as an incentive problem (i.e., a
substitution effect), it appears plausible to us that a significant
share of this response is explained by the (non-incentive)
income effect.
Source: Distinguishing Income from Substitution Effects in Disability Insurance. D. Autor and M. Duggan, 2007
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Topics in Economics of Ageing
Income and Substitution Effects
The Australian government ended the taxation of benefits, both lump sums
and annuities taken after age 60 in 2007 - given these changes only apply
from high minimum sums they will only affect the better-off.
It is doubtful that the proposed new superannuation tax concessions will have
the Treasurer’s claimed positive incentive effects on increased workforce
participation, including later retirement.
For the better off who will benefit, the changes have income and substitution
effects with opposite effects.
The income windfall gain will induce many people to work less and retire
earlier (negative income effect).
The removal of income earned on superannuation funds reduces the
effective marginal tax rate on earned income and this enhances the
return from work relative to leisure (positive substitution effect).
The negative income effect will dominate the positive substitution effects of
the proposed lower tax burden.
Source: Some Policy Issues in Providing Retirement Incomes. J. Freebairn. Melbourne Institute Working Paper Series No 6-07.
Jose L.
University
of Iparraguirre
Melbourne (ERINI)
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Topics in Economics of Ageing
The Life-Cycle (‘intertemporal allocation’) Approach
The life-cycle framework is the standard way that economists think
about the intertemporal allocation of time, effort and money.
(Browning and Crossley, 2001)
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Topics in Economics of Ageing
The Life-Cycle Approach
Main contention: Consumption (and saving) does not depend on
current income.
Instead, individuals consume a percentage of the present value of their
expected lifetime income -that is, they (we) prefer a flat consumption
profile over time.
Modern, more sophisticated versions state that we do not keep
consumption or expenditures constant, but we try to keep the value we
draw from each pound (i.e. the marginal utility of income) constant
over time: we prefer to ‘smooth’ consumption.
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Topics in Economics of Ageing
Some population projections
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Topics in Economics of Ageing
The Life-Cycle Approach
Life-cycle framework (cont’d)
Some testable conclusions:
We borrow in early years against future earnings, save during our
working years and consume our savings after retirement.
Approaching retirement, similar households -i.e. with similar jobs,
composition, etc.- should have similar levels of wealth.
During retirement, our consumption levels should not observe a
contraction with respect to previous stages of life.
At a microeconomic level, as people live longer, they need either
to work longer or to consume less.
At a macroeconomic level, as population ages and hence the ratio
of workers to the whole population goes down, consumption per
person decreases too.
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Topics in Economics of Ageing
The Life-Cycle Approach
Life-cycle framework (cont’d)
Problems with ‘the standard way that economists think about the
intertemporal allocation of time, effort and money’
Data do not fit the theoretical implications
Students spend too little (compared to predictions, that is!). The
student debt should not be an issue at all.
A fraction of the population never save.
Consumption displays a ‘hump’ between 44 and 55 years of age
Similar households end up with very dissimilar levels of wealth
when approaching retirement
Retired people do not dis-save as much as predicted.
Furthermore, the ‘bequest motive’ explanation is also undermined
by data: retired couple with living children save less than those
without children.
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Topics in Economics of Ageing
A Different Life-cycle Approach
The recent Marmot Review recommends the following key policies to reduce health inequalities amongst older people:
Give every child the best start in life
Enable all children, young people and adults
Increase access to lifelong learning, including work
to maximise their capabilities and have control
based learning and apprenticeships
over their lives
Create fair employment and good work for all
Improve quality of work
Workplaces adhere to equality legislation
Effective prevention of physical and mental health
problems at work
Improve flexibility in employment and retirement
Better, more suitable jobs for lone parents, carers,
people with mental/physical health problems
Ensure healthy standard of living for all
Minimum income for healthy living
Review systems to remove ‘cliff edges’ to facilitate
flexible employment
Implement progressive taxation
Create and develop healthy and sustainable
Mitigate effects of climate change
places and communities
Improve active travel
Improve access and quality of green and open spaces
Improve the food environment
Reduce fuel poverty
Integrate local delivery systems to address social determinants of health
Improve community capital and reduce social isolation
Strengthen the role and
Increase investment in ill health prevention
impact of ill health prevention
Increase availability and quality of drug treatment programmes
Reduce social gradient in obesity, smoking, alcohol
Focus public health efforts to reduce social gradient
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Topics in Economics of Ageing
Macroeconomics
Fundamental macroeconomic identities:
Y ≡C+I+G+X −M
Y ≡ OS + W + T − Sb
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Topics in Economics of Ageing
Where to find the data
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Topics in Economics of Ageing
What the data show
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What the data show
We can also look at net lending and borrowing by:
Households
Private corporations
Government and
UK with the Rest of the World
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Topics in Economics of Ageing
What the data show
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Topics in Economics of Ageing
Macroeconomics
Remember this slide?
Economic growth will depend less and less on labour force size and
growth and more and more on productivity growth
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Topics in Economics of Ageing
Macroeconomics
Economic growth (ie growth in GDP/GVA per head) can be decomposed into:
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Topics in Economics of Ageing
Macroeconomics
ERINI (2008)
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Macroeconomics
Some comparisons
A significant increase in employment rates
almost compensated for the negative labour
In West Midlands, despite positive productivity
growth, GVA per head fell due to reduced
productivity growth over the period.
number of hours worked
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Topics in Economics of Ageing
Macroeconomics
Some comparisons
In Scotland, negative productivity and employment
growth led to negative economic growth despite
In London the labour force diminished but
the number of hours worked went up and
positive growth in the labour force.
there was a positive demographic effect
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Macroeconomics
Some comparisons
Almost all the recent economic growth in China can be explained by an
upsurge in labour productivity -although, mainly related to a shift to
non-primary activities
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Topics in Economics of Ageing
Introductory Module to Economics of Ageing
Gentle Introduction to Economics
Economic Research Institute of Northern Ireland
Jose Luis Iparraguirre
March 2010
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