The Impact of Population Ageing and Human Capital on the Economic Growth in Iran: An Analysis with an Overlapping Generations Model

In this article, population aging in a closed economy whit a computable generalized Diamond overlapping generations (OLG) model has been investigated in which the element of human capital has been endogenously formed. In this study, the effect of population aging in a closed economy with 8 overlapping generations based on the Diamond model, capable of simulating the intergenerational differences has been designed for the Iranian economy across 50 years from 1400 to 1450. The research model includes 3 economic agents of household, firm, and government, whose behavior and decision-making are interdependent. First,the impact of aging on the dynamics of the macroeconomic variables, specifically economic growth has been simulated and Then, the impact of implementing policies to increase human capital on the dynamics of the macroeconomic variables has been simulated. According to growth models, long-term growth depends on two factors namely: the growth of the labor force and productivity growth. Aging reduces long-term growth by reducing labor force growth. But human capital growth through increasing productivity promotes long-term growth. Therefore, the effect of aging on economic growth is the consequence of these two factors. In the simulated model, a minimum growth of human capital is necessary to overcome the negative impacts of labor force growth reduction due to aging on economic growth. In the basic scenario, the parameter of the share of skilled labor (δ) according to the estimation of this variable in the Iranian economy is equal to 0.038983. To the extent that the growth of human capital is higher than the reduction in labor force growth due to aging, long-term growth increases, otherwise long-term growth reduces. The results show that population aging if combined with policies to increase human capital, can compensate for the negative impact of aging on growth