Lesson 6 — Labour Force & Productivity

Does the basic LCM always hold?

Not necessarily; ageing does not always reduce savings or increase consumption according to extended models and GE effects.

Cross-country evidence on LCM

US and Taiwan follow LCM; UK and Thailand do not, showing divergent age-savings profiles.

Why age alone is insufficient for savings patterns

Behavioural, institutional, and macroeconomic factors interfere with simple age-based predictions.

LCM extension: uncertainty

Longer life expectancy increases retirement saving; uncertainty raises savings.

LCM extension: precautionary savings

Negative expectations about future income or health increase precautionary savings.

LCM extension: insurance & savings

Weak insurance systems strengthen precautionary saving responses.

LCM extension: bequest motives

Strong bequest motives increase elderly savings and reduce dissaving.

Bequest motive ambiguity

Bequests increase savings for givers but reduce savings for recipients, making effects ambiguous.

LCM extension: pension systems

PAYG vs self-funded systems alter voluntary savings behaviour.

Why pension design affects savings

Pension incentives can increase or decrease private saving depending on structure.

LCM extension: Retirement consumption puzzle

Consumption patterns in retirement vary across countries—falls, rises, or remains unchanged.

Reasons consumption may fall in retirement

Home production and reduced work-related expenses reduce retirement consumption.

Reasons consumption may rise in retirement

Increased leisure spending or cultural norms can raise retirement consumption.

LCM extension: General equilibrium: aggregate savings

Falling household savings does not imply falling aggregate savings in GE framework.

General equilibrium: interest rate adjustment

Falling household savings can raise interest rates, which feeds back into investment demand.

General equilibrium: corporate & public savings

Corporate and government savings may offset declining household savings.

How ageing affects labour supply & productivity

Ageing reduces quantity of labour, productivity, and skills unless offset by policies.

Formula for GDP production function

GDP production function : GDP=A⋅f(K,Le)

Formula for effective labour (Le)

Effective labour: Le = ap × Edu × L.

Channel 1: age-productivity profile

Productivity follows an inverted U-shape; ageing reduces average ap.

How to prevent productivity decline with ageing

Retraining, job redesign, and technology usability can sustain productivity of older workers.

Channel 2: effect of ageing on L

Falling fertility reduces working-age population and lowers labour supply.

Channel 2: LFPR responses

Older and female workers may increase LFPR, partially compensating for ageing.

Channel 3: education & skills

Education and skills raise labour quality and counteract ageing effects.

How education mitigates ageing effects

Lifelong learning helps older workers maintain productivity.

Effect of ageing on Le under no policy change

Without policy: L↓ and ap↓ → Le↓ → GDP↓.

Policies that raise Le despite ageing

Retraining, education, delayed retirement, and technology adoption can raise Le despite ageing.