MACRO: Professor Michael Sposi (Southern Methodist University)

From Demographic Dividend to Demographic Drag: Economic Growth and Fertility in South Korea

South Korea experienced an exceptional decline in fertility, from among the highest rates in the world to one of the lowest today. The decline coincided with an aggressive government family-planning campaign and overlapped with Korea’s remarkable economic growth. We study the long-run consequences of this demographic transition using a calibrated overlapping-generations model in which government policy shifts fertility norms, while fertility affects human-capital investment, labor supply, and child-rearing costs. Lower fertility initially creates a demographic dividend by reducing dependency burdens and increasing investment per child. These forces also reshape social norms and future labor supply, allowing low fertility to persist after the policy ends. Over time, however, smaller working-age cohorts increase the burden of supporting a largely elderly population. We quantify the historical gains from Korea’s demographic window and compare them with the emerging and projected costs of demographic drag.