Implications of population aging for labor supply and economic growth in China: A CGE Analysis

This paper investigates the implications of population aging for labor supply and economic growth in future China. We particularly introduce an indicator of labor supply – effective labor – taking into account the differences on labor productivity across age groups. Based on a Computable General Equilibrium (CGE) model, we simulate four scenarios with various labor supply assumptions, and compare the effects on changes of price of factor labor, economic output and industrial structure. Our results show that total effective labor supply in China is expected to peak in 2017 and then continue to drop faster and more volatile than total population and total labor force. In the scenario of effective labor supply, the growth rate of GDP in China in the first half of this century will decline faster and fluctuate greater than in the other scenarios where labor supply is assumed to follow the development of total population or total labor force. If labor supply is assumed to follow only the dynamics of working-age population, the estimated economic growth may be underestimated in the future. Our study suggests that the labor heterogeneity of age groups should not been overlooked when we assess labor supply, to avoid misjudging future economic growth and industrial structure change.