ESRI Discussion Paper Series No.384 Female Labor Supply and Demographic Aging and Their Impacts on the Aggregate Economy and Fiscal Sustainability: A General Equilibrium-OLG Approach

 In this study, we quantitatively analyze the impact of demographic aging on the macroeconomy and fiscal sustainability in Japan using a general equilibrium overlapping generation model. We introduce model elements such as individuals’ heterogeneity in gender and marital status to quantify the effects of changes in individual economic conditions on macroeconomic and fiscal conditions.
 Furthermore, we incorporate details of the public social insurance system, including public pension, healthcare, and long-term care insurance programs and associated government expenditures that evolve with changing demographics.

 Based on the baseline model that uses the National Institute of Population and Social Security Research's population projections of 2023, total labor supply is projected to decrease by approximately 35% from 2020 to 2050. Although overall savings will temporarily increase due to extended life expectancy, they are expected to decline thereafter. Public pension, healthcare, and long-term care insurance expenditures will continue to rise, and in order to sustain the current fiscal system, the additional tax burden of over 600,000 yen per capita will be required in the 2060s.

 Turning attention to the labor market, the employment rate and annual income of women are lower than those of men. In particular, annual income is significantly lower among married women. If married women were to earn equivalent income to single women, our analysis suggests that the total labor supply in 2050 would increase by about 8% compared to the baseline, with an approximate reduction of 60,000 yen in the tax burden per capita. More substantial effects can be expected if women's income level approaches that of men. Both men and women experience a significant decrease in employment rates and income after their mid-50s, and the decline in aggregate labor supply can be mitigated if they continue to remain in the labor force.

 Although the short-run effects of changes in birth rates on the macroeconomy and public finances are small, we show that they would have significant impacts in the post-2060 period when the proportion of elderly individuals and tax burdens reach their peaks.