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Aging and Pensions in General Equilibrium: Labor Market Imperfections Matter

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  • David de la Croix

    ()

  • Olivier Pierrard

    ()

  • Henri R. Sneessens

    ()

Abstract

This paper re-examines the effects of population aging and pension reforms in an OLG model with labor market frictions. The most important feature brought about by labor market frictions is the connection between the interest rate and the unemployment rate. Exogenous shocks (such as aging) leading to lower interest rates also imply lower equilibrium unemployment rates, because lower capital costs stimulate labor demand and induce firms to advertize more vacancies. These effects may be reinforced by increases in the participation rate of older workers, induced by the higher wage rates and the larger probability of finding a job. These results imply that neglecting labor market frictions and employment rate changes may seriously bias the evaluation of pension reforms when they have an impact on the equilibrium interest rate.

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Bibliographic Info

Paper provided by Central Bank of Luxembourg in its series BCL working papers with number 62.

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Length: 40 pages
Date of creation: Jul 2011
Date of revision:
Publication status: Forthcoming in Journal of Economic Dynamics and Control
Handle: RePEc:bcl:bclwop:bclwp062

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Web page: http://www.bcl.lu/

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Keywords: Overlapping Generations; Search Unemployment; Labor Force Participation; Aging; Pensions; Labor Market;

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Citations

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Cited by:
  1. Luca Marchiori & Olivier Pierrard, 2012. "LOLA 2.0: Luxembourg OverLapping generation model for policy Analysis," BCL working papers, Central Bank of Luxembourg 76, Central Bank of Luxembourg.
  2. T. Buyse & F. Heylen & R. Van De Kerckhove, 2011. "Pension reform, employment by age, and long-run growth in OECD countries," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium, Ghent University, Faculty of Economics and Business Administration 11/719, Ghent University, Faculty of Economics and Business Administration.
  3. T. Buyse & F. Heylen & R. Van De Kerckhove, 2012. "Pension reform in an OLG model with heterogeneous abilities," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium, Ghent University, Faculty of Economics and Business Administration 12/810, Ghent University, Faculty of Economics and Business Administration.
  4. Marchiori, Luca & Pierrard, Olivier & Sneessens, Henri R., 2011. "Demography, Capital Flows and Unemployment," IZA Discussion Papers 6094, Institute for the Study of Labor (IZA).
  5. Vogel, Edgar & Ludwig, Alexander & Börsch-Supan, Axel, 2013. "Aging and Pension Reform: Extending the Retirement Age and Human Capital Formation," MEA discussion paper series, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy 12257, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  6. Jan Hagemejer & Krzysztof Makarski & Joanna Tyrowicz, 2013. "Efficiency of the pension reform: the welfare effects of various fiscal closures," Working Papers 2013-23, Faculty of Economic Sciences, University of Warsaw.
  7. Tim Buyse & Freddy Heylen & Renaat Van de Kerckhove, 2013. "Pension reform, employment by age, and long-run growth," Journal of Population Economics, Springer, Springer, vol. 26(2), pages 769-809, April.
  8. Loumrhari, Ghizlan, 2013. "Vieillissement démographique, longévité et épargne. Le cas du Maroc
    [Ageing population, longevity and save. The case of Morocco]
    ," MPRA Paper 50649, University Library of Munich, Germany.
  9. Fedotenkov, I., 2012. "Pensions and ageing in a globalizing world. International spillover effects via trade and factor mobility," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5590843, Tilburg University.

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