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Aging, Unemployment, and Welfare in a Life-Cycle Model with Costly Labor Market Search

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  • Bhattacharya, Joydeep
  • Reed, Robert

Abstract

In recent years, many countries have experienced a significant shift in demographic patterns towards the elderly. This phenomenon poses numerous challenges for the design of public pension programs and labor market policies. To better understand how public policy should be designed in response to a aging workforce, it is imperative to first make an assessment of how the lifecycle affects aggregate labor market activity, and in particular, unemployment. While much work has been done on exploring how the lifecycle influences individual labor market behavior, its impact on aggregate labor market outcomes is far less studied. This paper is an attempt at addressing this lacuna within the context of a lifecycle model with costly search and matching in the labor market. The lifecycle of workers in conjunction with frictions in the labor market produces an environment in which unemployment arises as a natural possibility and both young and old workers find themselves contemporaneously competing for the same jobs. The lifecycle is shown to have significant implications for aggregate labor market activity; it may even be responsible for an inefficient allocation of workers to jobs. Additionally, public policies designed to increase labor market participation among older workers may not necessarily enhance aggregate welfare.

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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 10255.

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Date of creation: 27 Mar 2003
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Handle: RePEc:isu:genres:10255

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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Keywords: search; labor market efficiency; unemployment; lifecycle;

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References

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  1. Bhattacharya, Joydeep & Mulligan, Casey & Reed, Robert, 2003. "Labor Market Search and Optimal Retirement Policy," Staff General Research Papers 10251, Iowa State University, Department of Economics.
  2. Bean, Charles & Pissarides, Christopher, 1993. "Unemployment, consumption and growth," European Economic Review, Elsevier, vol. 37(4), pages 837-854, May.
  3. Louis S. Jacobson & Robert J. LaLonde & Daniel G. Sullivan, 1992. "Earnings losses of displaced workers," Working Paper Series, Macroeconomic Issues 92-28, Federal Reserve Bank of Chicago.
  4. Bhattacharya, Joydeep & Reed, Robert, 2003. "Age-Specific Employment Policies," Staff General Research Papers 10256, Iowa State University, Department of Economics.
  5. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345, Octomber.
  6. Diamond, Peter A, 1982. "Wage Determination and Efficiency in Search Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 217-27, April.
  7. Robert Shimer, 2001. "The Impact Of Young Workers On The Aggregate Labor Market," The Quarterly Journal of Economics, MIT Press, vol. 116(3), pages 969-1007, August.
  8. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  9. Davidson, Carl & Martin, Lawrence & Matusz, Steven, 1994. "Jobs and Chocolate: Samuelsonian Surpluses in Dynamic Models of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(1), pages 173-92, January.
  10. Daniel Rodriguez & Madeline Zavodny, 2000. "Are displaced workers now finished at age forty?," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 33-48.
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Cited by:
  1. Bhattacharya, Joydeep & Reed, Robert, 2003. "Age-Specific Employment Policies," Staff General Research Papers 10256, Iowa State University, Department of Economics.
  2. Fouad Khaskhoussi, 2009. "Job-Search Effort, Retirement Decision and Pension Reform: A Wage Bargaining Investigation," Economics Bulletin, AccessEcon, vol. 29(2), pages 1255-1263.
  3. Batyra, Anna & de la Croix, David & Pierrard, Olivier & Sneessens, Henri R., 2013. "Declining bargaining power of workers and the rise of early retirement in Europe," GIAM Working Papers 13-6, Galatasaray University Economic Research Center.

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