Lecture 5. Additional Factors in Long-Run Economic Growth
Recommended reading : 【Macroeconomics】 Macroeconomics Table of Contents
1. Finance
2. Aging
3. Income inequality
1. Factor 1. Finance
(1) Finance → Economic growth
① Mechanism 1. Improving the efficiency of allocating funds : pooling small savings to supply the funds needed for large-scale investments with higher productivity
② Mechanism 2. Providing funding for education investment : by lowering investment costs, it promotes highly productive investment in physical and human capital
③ Empirical research : as of 1960
○ Per-capita income in the bottom 20% of countries increased by 1.2% per year between 1960 and 2000
○ Per-capita income in the top 20% of countries increased by 3.2% per year over the same period
(2) Economic growth → Financial development
① As the economy grows, financial deepening occurs
② IT innovation in the real sector → financial development : fintech
2. Factor 2. Aging
(1) Korea’s current status
① In 2000, the share of the elderly in the total population reached 7.2%, entering an “aging society”
② In 2018, the share of the elderly exceeded 14%, entering an “aged society”
③ In 2026, the share of the elderly is expected to reach 20%, entering a “super-aged society”
(2) Aging → Deterioration of economic growth
① Mechanism 1. A decline in both the quantity and quality of the labor force
② Mechanism 2. A decline in overall savings in society
○ The share of younger people who save decreases
○ The share of older people who have negative savings increases : reduced capital accumulation
(3) Solutions : ways to improve the quantity or quality of labor
① Increase women’s labor force participation
② Inflow of overseas labor
③ Extend the retirement age
④ Improve labor quality
(4) Empirical research : study of the major seven countries (G7)
① Short-run evidence : effective labor supply decreases, reducing real GDP per capita
② Long-run evidence : investment in human capital increases (∵ lifelong education, etc.), raising labor productivity and GDP per capita
3. Factor 3. Income Inequality
(1) Income inequality → Economic growth
① In imperfect capital markets, small entrepreneurs and low-income households facing credit constraints find it difficult to carry out appropriate levels of physical-capital investment and human-capital investment, respectively
② Political and social instability increases, crime rises, and the costs of prevention increase
(2) Solution 1. Intergenerational/class mobility
① Mobility between social classes matters more than income inequality itself
② Education, in particular, increases mobility
(3) Solution 2. Income redistribution policies
① Policies to mitigate inequality in market income that arises as a result of economic growth
② Taxes and cash transfers : different effects
○ High levels of taxes and subsidies → reduced incentives to invest and reduced labor supply
○ Reduced political and social instability → positive effects on investment
○ Increased education and health spending among low-income groups
○ Easier to form social consensus when a crisis occurs
(4) Solution 3. Fiscal policy for inclusive growth
① Support improved access to education services, etc., so that many economic agents can have opportunities to contribute to economic growth
② A long-term approach that generally takes a relatively long time for results to appear
(5) Empirical research
① In the U.S., redistribute 6% of GDP by having the top 30% income group support the bottom 70%
② It is estimated that the U.S. long-run economic growth rate rises by 0.5% due to increased human-capital investment among lower-income groups, etc.
Entered: 2020.10.10 13:43