Demographic structure, knowledge diffusion, and endogenous productivity growth

This paper considers how increasing longevity and declining birth rates affect market entry and endogenous productivity growth in a two-country model of industry location and trade. Firm-level investment in process innovation generates productivity growth, and with imperfect knowledge diffusion the larger country, measured by labor force size, has a greater share of relatively productive firms. In this framework, population aging reduces a country's labor supply, share of industry, and relative productivity. If the smaller country experiences population aging, knowledge spillovers improve and the rate of productivity growth rises, as the level of market entry falls. Alternatively, population aging in the larger country weakens knowledge spillovers and lowers the rate of productivity growth, but has an ambiguous affect on market entry. A quantitative analysis of the framework based on population data for the United States and Western Europe is used to consider the welfare implications of demographic transition.