This document discusses using an overlapping generations (OLG) economic model to simulate the potential economic benefits of improved health and human capital for younger generations in Poland. The model would analyze how reliable scenarios for increased life expectancy in good health could impact labor supply patterns over age. This could help understand the long-term fiscal and welfare consequences of changes to labor supply driven by better health and education. The OLG model is preferred over partial equilibrium simulations as it allows for behavioral responses, general equilibrium effects, and cost-benefit welfare analysis of policy scenarios.

1. What economic benefits could bring improvement of
health and human capital of younger generations –
simulations using OLG model?
European Population Conference 2018
Research financed from NCN grant: „Fiscal and welfare effects of changes in fertility and health in an aging
society – insights from OLG modelling” (2014/13/D/HS4/03643).
Paweł Strzelecki
Warsaw School of Economics
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2. 2
Outline
• Motivation
• Healthy life expectancy and labour market activity
• Modelling strategy
• Why OLG and not partial equilibrium simulations?
• Next steps

3. Increasing expenditures on health care  consequence of
population ageing
but
Increasing expenditures on health care  longer life in better
health  longer labour market careers  more GDP growth, taxes
and welfare
Key question: What are the possible future benefits resulting from
the health improvements?
Steps:
(1)what are reliable scenarios for life expectancy in a good health?,
(2)to what extend the increasing life expectancy in good health and
better educational attainment can change labour supply patterns
by age?,
(3)What can be the long-term consequences of changes in labour
supply patterns resulting from better health and educational
Motivation
3

4. HLE vs LE - Females
POLAND
2015: e0=81.3, HLE=71,3
2000: e0=77,9, HLE=68,8
50 55 60 65 70 75 80 85 90
Thailand
Turkey
Latvia
Oman
Bahrain
Bosnia
Lithuania
Maldives
Qatar
Argentina
Croatia
Slovakia
Uruguay
Viet Nam
Cuba
United States of America
Panama
Poland
Czechia
Estonia
Costa Rica
Chile
Denmark
Cyprus
United Kingdom
Germany
Netherlands
Belgium
Malta
Ireland
Greece
Slovenia
New Zealand
Austria
Iceland
Israel
Sweden
Norway
Finland
Portugal
Australia
Canada
Italy
Luxembourg
Singapore
Switzerland
Republic of Korea
France
Spain
Japan
e0
HALE
Source: WHO
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5. HLE vs LE - Males
POLAND
2015: e0=73,4,
HLE=64,9
2000: e0=69,5,
HLE=62,0
50 55 60 65 70 75 80 85 90
Poland
Serbia
Slovakia
Mexico
The former Yugoslav republic of…
Kuwait
Ecuador
Tunisia
Montenegro
Albania
Croatia
Iran (Islamic Republic of)
Bosnia and Herzegovina
Morocco
China
Lebanon
Panama
Brunei Darussalam
Oman
Algeria
Czechia
United States of America
Chile
United Arab Emirates
Cuba
Costa Rica
Maldives
Qatar
Slovenia
Cyprus
Germany
Portugal
Bahrain
Greece
Belgium
Finland
Austria
Denmark
Republic of Korea
United Kingdom
Ireland
Malta
Netherlands
France
Spain
Israel
Luxembourg
Italy
New Zealand
Sweden
Norway
Australia
Canada
Singapore
Iceland
Japan
Switzerland
e0
HALE
Source: WHO
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6. Theory – morbidity expansion or
compression
Different views about future changes:
- Morbidity expansion
- Morbidity compression
- Dynamic equilibrium
In Poland e0 increase mainly due to
lower mortality in older ages – less
than proportional increase of HLE in
comparison to e0
Probability of ability to work
increases due to:
- Spread of the tertiary education
(more healthy lifestyle)
- Technology – (ex: less jobs require
physical strength)
- More persons with disabilities
active on the labour market
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7. HLE and labour market careers in the EU
25
30
35
40
45
50
60 65 70 75
Averageworkcareer
HLE in the EU countries
25
30
35
40
45
50
60 65 70 75
Averageworkcareer
HLE in the EU countries
FemalesMales
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8. • Sources of the increase in the healthy life expectancy (cohort effects,
composition effects of spreading education, etc.)
• Relation between increasing HLE and labour force participation
 Solution: analysis on the SHARE and Polish „Social Diagnosis”
survey microdata
• Translation of the micro-findings from the data into „stylised facts” to the
macroeconomic model
 Solution: small microsimulation model
• Analysis of improving health based on empirical dana use to omit
economic consequences or finish with simulations based on simplified,
partial equilibrium approach
 Solution: OLG model
Problems
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9. 9
Overlapping Generational Model
• The General Equilibrium economic model with the expended
heterogeneity of consumers (Auerbach and Kotlikoff, 1986). Models can
take into account single year age groups, the replacing of the older
cohorts by the new ones and intra-cohort heterogeneity (gender, no. of
children).
• Households (consumers) in the model:
- are paid market clearing wage for labour supplied and receive market
clearing interest on private savings
- are free to choose how much to work before retirement
- probabilities of dying from the life table
- optimize lifetime utility derived from leisure and consumption
• Producers maximize the difference between output and costs of
production and cost of capital but with exogenous total factor productivity
growth
• There is a place for government that:
- collects taxes and contributions
- finances public consumption plus pay pensions

10. 10
Modeling
Defining the scenarios of the
epidemiologic transition, possible
retiremnt age increase etc.
Analysis of the microdata to:
- find determinants of the HLE
changes
- estimation of the parameters of
the models
Simulation using simple
microsimulation model to assess:
- Influence of different
determinants of health on future
outcomes
- How better health can transform
into higher labour force
participation
Simulation using general equilibrium:
Overlapping Generation Model (OLG):
- economic impact of the better health
- welfare effect of the better health

11. Why overlapping generations model (OLG)?
 Simple extension of the empirical age profiles to the
future can be not enough or even missleading
(ex: fertility simulations):
- behavioral response (optimization)
- general equlibrium effects
 Economic microfundations – opportunity to explain
adjustemnt in more „behavioral” way
 OLG allows not only cost but olso welfare analysis
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12. Next steps
 Attempts to explain gains in HLE
 Microsimulations of reactions of persons with better
health to current and potnetially higher retirement age
 OLG simulation fitted to Polish data with different
scenarios of „propensity to work” and „productivity” of
agents.
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13. Thank you for your attention
pawel.strzelecki@sgh.waw.pl
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14. 14
When general equlibrium matters?-
LM effects of increased fertility
Demographic simulation
applied to partial
equilibrium
OLG simulations
Author Working Group on Ageing
(2018)
Malec et al. (2018)
Approach Comparison of the results with
baseline population projection
and „lower fertility” population
projection
Simulation from the economic model
with extended „demography” – age
heterogeneity built in the model. Intra
cohort heterogeneity (age, no of
children: 0,1,2,3+).
Results Significant influence on GDP in
the long-term (0,6% in 2060)
and is increasing in time
Relatively limited gains from increased
fertility (0,2% GDP per year) because
of the negative influence on LFPR of
mothers. Relatively better results if
additional children in bigger families.