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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.

Suggested Citation

  • David de la Croix & Olivier Pierrard & Henri R. Sneessens, 2011. "Aging and Pensions in General Equilibrium: Labor Market Imperfections Matter," BCL working papers 62, Central Bank of Luxembourg.
    • Handle: RePEc:bcl:bclwop:bclwp062
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    More about this item

    Keywords

    Overlapping Generations; Search Unemployment; Labor Force Participation; Aging; Pensions; Labor Market;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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