Effects of the Demographic Changes on Private Consumption: An Almost Ideal Demand System Analysis for Austria

(ProQuest: ... denotes formulae omitted.)IntroductionAs with the case of many industrialized countries, Austria faces a decreasing birth rate and an increasing life expectancy with the consequence of an ageing population. From 2013 to 2030 the share of older people (65 and more years) is expected to rise by 5.8 percentage points: from 18.2% to 24.0%. Simultaneously, the shares of young people (0-19 years) and the potential working population (20-64 years) will decline by 0.8 and 4.9 percentage points, respectively (Statistik Austria, 2013a). These demographic trends will not only be a test for the federal pension system and affect the labour market, but will also influence private consumption. In Austria, private consumption accounts for more than 50 % of GDP (53.6% in 2012; Statistik Austria, 2013b) and is therefore a crucial economic factor, which influences the production side and the demand of labour in an economy, additionally.The consumption behaviour of a household varies greatly by age due to differing preferences and needs with increasing age of the household members. The following paper aims to estimate potential effects of the demographic changes on the structure of private consumption in Austria. An extended Almost Ideal Demand System (AIDS) is estimated to receive age-specific demand equations for Austria as a whole as well as on regional level. The demand system is subsequently used to simulate potential effects of demographic changes (ageing, changing household size), as well as variations in income and prices on the structure of private consumption in Austria up to the year 2030.The paper is structured as follows: Part two gives an overview of the literature. In part three the estimated extended AIDS model and its specifications are defined. In part four data used for the analysis is described. The results of the model estimation, that is income elasticity for seven age groups and price elasticity, are presented in fifth part. Sixth part focuses on the scenarios and the potential effects of population ageing on private consumption in Austria. While scenario 1 shows the direct effects of the ageing of the population, in scenario 2 the changing household size as demographic trend is included, additionally. Scenarios 3 and 4 focus on potential changes in income, as well as prices, and its effects on private consumption. Finally, in chapter 7 a conclusion is given.Literature ReviewHouseholds have a limited income available and choose which goods and services to consume. Microeconomic consumer theory focuses on a household's decision on what and how much to consume. According to theory the choice of goods and services is determined by the preferences of the household, with the aim to maximize utility under the given income of the household and prices of the goods and services (Woeckener, 2006, p. 65ff). The preferences of a household are dependent on household specific characteristics as the size of the household, its composition or age structure, as well as regional or legal parameters and changes in time. Regarding demographic indicators, the consumption behaviour of a household varies greatly by age due to differing preferences and needs with increasing age of the household's representative. As an example, in general, young people will have higher expenditures in the field of education, while older people demand more goods and services in the health sector. Contrarily, work related expenditures (such as for transportation or clothing) are decreasing in retirement (Hurst, 2008). Furthermore, the consumption structure differs by age cohort due to the comparable historical, economical or societal framework people went through (Evans, Jamal and Foxall, 2009, p. 158ff).The differences in consumption by age are empirically shown by various studies. Foot and Gomez (2006) prove with data for Great Britain that the consumption structure of private households changes greatly by age. …