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Aging and Pensions in General Equilibrium: Labor Market Imperfections Matter

  • 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))

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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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
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Handle: RePEc:ctl:louvir:2010037
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