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Aging and Pensions in General Equilibrium: Labor Market Imperfections Matter

  • de la Croix, David

    ()

    (Université catholique de Louvain)

  • Pierrard, Olivier

    ()

    (Central Bank of Luxembourg)

  • Sneessens, Henri R.

    ()

    (University of Luxembourg)

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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5276.

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Length: 34 pages
Date of creation: Oct 2010
Date of revision:
Publication status: published in: Journal of Economic Dynamics and Control, 2013, 37 (1), 104-124
Handle: RePEc:iza:izadps:dp5276
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