Demographics, Immigration, and Market Size

This paper constructs an overlapping generations model wherein people decide their number of children and levels of consumption for differentiated goods. We further assume that immigration takes place according to the difference between the utility inside and outside a country. We show that an improvement in longevity has three effects on the market size and welfare: First, it decreases the number of children. Second, it increases the per capita expenditure on consumption. Finally, it increases immigration. The first effect has negative impacts on market size and welfare whereas the latter two effects have positive impacts. We then calibrate our model to match Japanese and U.S. data from 1955 to 2014 and find that the negative effects dominate the positive ones. Moreover, our counterfactual analyses show that accepting immigration in Japan can be useful in overcoming population and market shrinkage caused by an aging population.