Life-expectancy

WHY HIGHER LIFE EXPECTANCY LEADS TO MORE EDUCATION AND LESS WORK

The rise in life expectancy in developed countries over the last two centuries has resulted in people seeking more education but deciding to work fewer hours over their lifetimes. Research by Holger Strulik and Katharina Werner, presented at the Royal Economic Society’s 2013 annual conference, explains this surprising fact.

Their study suggests that because people can expect to live for longer and remain healthy for longer, they have the option of working for longer. In the past, people would have to work for much of their lives and save large amounts in the expectation of long periods when they were too old and weak too work.

But as health in old age is improving, this is no longer the case. This allows people to spend longer in education, which then enables them to get a higher earning job and to be able to retire earlier, knowing that their savings can finance a longer retirement as they expect to be healthier than previous generations.

The authors argue that increasing life expectancy explains the evolution of education, labour supply and economic growth in the US over the last two centuries. They conclude:

‘Our approach can be used to explain long-run trends of GDP growth and productivity growth. In particular, our analysis is able to explain the historical evolution of education and long-run growth in the US since 1830 by changes in life expectancy.’

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Over the last centuries life expectancy has increased drastically. Furthermore, it has been observed that with the increase in life expectancy, people spend more time on education and, surprisingly, they prefer to work less and enjoy more leisure.

Theory suggests that with an increase in life expectancy, people prefer to go to school longer because they face a longer working life in which they can then earn a higher income due to their increased education. Hence, because working is more lucrative, lifetime labour supply should increase as well. In contrast to this theory, historical data for the US shows that lifetime labour supply has decreased over the last centuries.

This study proposes a novel theory based on the concept of healthy life expectancy, which explains why higher life expectancy leads to more schooling and less lifetime labour supply.

Over the last decades, the health of the elderly has improved. Even more, people can expect to live longer as well as to stay longer healthy. In particular with an increase in life expectancy, they gain more healthy years than unhealthy ones. This is reflected by the concept of healthy (or active) life expectancy. The WHO defines healthy life expectancy as the average number of years that a person can expect to live in full health, that is, without any disability or injury.

The research divides the adulthood of individuals into a healthy period, where they divide their time between labour supply and leisure, and an unhealthy period, where the individuals have to retire because of their low health status.

After an increase in life expectancy, people prefer to have more schooling, no matter which of the two adulthood periods increases. More schooling leads to a higher wage during employment but first reduces the time in employment. If now the working period becomes longer, the higher wages overcompensate the lost income during schooling. Furthermore, with a rise in longevity, they have to finance a longer period of retirement during the unhealthy state.

The effect of increasing life expectancy on lifetime labour supply is ambiguous. If people expect to stay longer in an unhealthy state they have to work more during the healthy period to finance consumption during retirement. But if the healthy period is getting longer, people prefer to work less per month/year and to enjoy more leisure.

The effect on total labour supply is ambiguous, because after an increase in healthy life expectancy the healthy period is longer, but the individuals work less per time increment. Therefore, a scenario in which the total labour supply decreases and education increases while life expectancy rises can be explained.

Not only can this model explain the general trends, but also the absolute values. To this end, the researchers have calibrated the model to the data for the US. The dashed red lines in the figure below show the historical data for US males born between 1840 and 1970, while the solid blue lines are the predictions of the model.


Embedded into a macro economy, this approach can be used to explain long-run trends of GDP growth and total factor productivity growth. In particular, the model is able to explain the historical evolution of education and long-run growth in the US since 1830 by changes in life expectancy.

ENDS


Notes for editors:

‘Life Expectancy, Labor Supply, and Long-Run Growth: Reconciling Theory and Evidence’ by Holger Strulik and Katharina Werner

Contact:

Katharina Werner (kwerner@uni-goettingen.de)

RES media consultant Romesh Vaitilingam:
+44 (0) 7768 661095
romesh@vaitilingam.com
@econromesh

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