Department of Economics Working Papers,
Vienna University of Economics and Business, Department of Economics

Abstract: Fertility rates have declined dramatically across almost all high-income countries over the past decades. This has raised concerns about future economic prospects. Indeed, fully– and semi–endogenous growth models imply that a shrinking workforce would lead to declining income growth and perhaps even stagnation. We extend the previous analyses to explicitly incorporate an endogenous quantity/quality trade-off between fertility and human capital accumulation. This allows us to assess the extent to which a declining number of workers can be compensated by increasing education. Our analysis demonstrates that economic growth needs not necessarily to decline with a falling population. Under certain conditions, human capital investment can sustain technological progress and economic growth despite the demographic challenges we are facing.

Keywords: Demographic Change, Fertility Decline, Economic Growth, Research and Development, Endogenous Fertility, Endogenous Education, Human Capital Accumulation

JEL-codes: J11; J13; O33; O41; I25 April 2025

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