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Aging, labour market dynamics and fiscal imbalances

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  • Luca Marchiori

    (Banque centrale du Luxembourg)

  • Olivier Pierrard

    (Banque centrale du Luxembourg)

  • Henri R. Sneessens

    (Université du Luxembourg, IZA and Universite catholique de Louvain)

Abstract

Population aging is a phenomenon common to all regions in the developed world, forcing most governments to implement structural reforms in order to avoid the development of fiscal imbalances. In Luxembourg, large inflows of – young – foreign workers generate an apparently sound public pension system, although no major structural reform has been implemented yet. In this paper, we study the interactions between demographic changes, labour market dynamics and public finance, by building an overlapping generations structure with New Open Macroeconomics and labour market frictions à la Diamond- Mortensen-Pissarides. We calibrate the model on Luxembourg data and we show that foreign labour inflows are a palliative but not a long term solution to the fiscal consequences of aging, and that only deep – and unpopular – fiscal reforms could solve the expected deficit problem. We also show that without foreign trade, foreign labour inflows would increase the domestic unemployment rate. This underlines the need to combine in a single framework the NOEM and the search and matching approaches.

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Bibliographic Info

Paper provided by National Bank of Poland, Economic Institute in its series National Bank of Poland Working Papers with number 122.

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Length: 35
Date of creation: 2012
Date of revision:
Handle: RePEc:nbp:nbpmis:122

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Keywords: Overlapping Generations; Aging; Fiscal Imbalances;

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  1. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-60, June.
  2. Pierrard, Olivier, 2008. "Commuters, residents and job competition," Regional Science and Urban Economics, Elsevier, vol. 38(6), pages 565-577, November.
  3. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
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