Demographic transition implies severe challenges for high income nations, for instance Japan, as the population decreases due to declines in birth rates as well as the higher rate of elderly population. More women are entering the labor market which affects birth rates. In addition, technological progress has improved health care and standard of living, bringing up life expectancies. However, the elderly population is increasing, elevating the dependency ratio which dampens the economic growth. The changed age structure alters the ratio of labor force negatively relative to population, in spite of the higher female labor participation. This paper analyzes how the current demographic transition in advanced countries influences economic growth.

The paper is focused on Japan that is currently dealing with the consequences from the fastest increase in the percentage share of the elderly population compared to the other high income countries. The empirical analysis is based on a growth accounting model that estimates the impact of demographic factors on growth rates in high income countries. The empirical results indicate that demographic factors such as life expectancy and total dependency ratio have a negative impact on economic growth. The conclusion is that Japan and other rich countries have to make greater efforts in dampening the demographic change by policy making and in-migration.