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Aging and Pensions in General Equilibrium: Labor Market Imperfections Matter

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Author Info

  • David de la Croix

    ()
    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and CORE)

  • Olivier Pierrard

    ()
    (Banque centrale du Luxembourg and IRES, UCL)

  • Henri Sneessens

    ()
    (Université du Luxembourg, CREA and IRES (UCL))

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 Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2010037.

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Length: 32
Date of creation: 31 Sep 2010
Date of revision:
Handle: RePEc:ctl:louvir:2010037

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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 & Henri R. Sneessens, 2011. "Demography, capital flows and unemployment," CREA Discussion Paper Series 11-14, Center for Research in Economic Analysis, University of Luxembourg.
  2. 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 12/810, Ghent University, Faculty of Economics and Business Administration.
  3. Tim Buyse & Freddy Heylen & Renaat Van de Kerckhove, 2013. "Pension reform, employment by age, and long-run growth," Journal of Population Economics, Springer, vol. 26(2), pages 769-809, April.
  4. 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 11/719, Ghent University, Faculty of Economics and Business Administration.
  5. 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.
  6. Luca Marchiori & Olivier Pierrard, 2012. "LOLA 2.0: Luxembourg OverLapping generation model for policy Analysis," BCL working papers 76, Central Bank of Luxembourg.

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