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Policy effects of the elasticity of substitution across labor types in life cycle models

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  • Cassou, Steven P.
  • Gorostiaga, Arantza
  • Uribe-Zubiaga, Iker

Abstract

This paper investigates how the production function elasticity of substitution across different labor types impacts the results of policy analysis in multiperiod lived agent overlapping generations models. We critique and investigate the popular structure that simply assumes that workers with different age, experience or education are perfectly substitutable in production. This structure is inconsistent with empirical evidence of production complementarities. We couch our findings in the context of two types of policy reforms: a social security reform and a tax reform. These reforms were chosen in part not only because of the large interest in them, but also because of their differing effects on life cycle decisions. We find that ignoring production complementarity may influence the conclusions of policy analysis.

Suggested Citation

  • Cassou, Steven P. & Gorostiaga, Arantza & Uribe-Zubiaga, Iker, 2013. "Policy effects of the elasticity of substitution across labor types in life cycle models," Economic Modelling, Elsevier, vol. 35(C), pages 59-70.
    • Handle: RePEc:eee:ecmode:v:35:y:2013:i:c:p:59-70
    DOI: 10.1016/j.econmod.2013.06.021
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    2. Del Rey, Elena & Lopez-Garcia, Miguel-Angel, 2016. "Endogenous growth and welfare effects of education subsidies and intergenerational transfers," Economic Modelling, Elsevier, vol. 52(PB), pages 531-539.
    3. Wang, Jun & Hu, Yong & Zhang, Zhiming, 2021. "Skill-biased technological change and labor market polarization in China," Economic Modelling, Elsevier, vol. 100(C).

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    More about this item

    Keywords

    Labor complementarity; Overlapping generations model; Fiscal policy reform; Social security reform;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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