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Fiscal policy, employment by age, and growth in OECD economies

  • F. HEYLEN

    ()

  • R. VAN DE KERCKHOVE

    ()

  • -

We build and parameterize a general equilibrium OLG model for an open economy to study hours of work in three age groups, education of the young, and aggregate per capita growth. The composition of fiscal policy plays a crucial role. The government sets tax rates on labor, capital and consumption. It allocates its revenue to productive expenditures (mainly for education), consumption and ‘non-employment’ benefits. Labor taxes and benefits may differ across age groups. We find that our model’s predictions match the facts remarkably well for all key variables in many OECD countries. We then use the model to investigate the effects of various fiscal policy shocks on employment by age and growth, as well as on welfare of current and future generations. We identify ‘non-employment’ benefits and labor taxes as the main policy variables affecting employment. Productive government expenditures are the most effective with respect to long-run output and growth. Long-run output and growth may benefit also from labor tax cuts targeted at older workers. Considering welfare effects, however, these policy measures may not be the ones preferred most by current generations.

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File URL: http://wps-feb.ugent.be/Papers/wp_09_623.pdf
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Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 09/623.

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Length: 35 pages
Date of creation: Dec 2009
Date of revision:
Handle: RePEc:rug:rugwps:09/623
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Web page: http://www.ugent.be/eb

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  1. Fougere M. & Harvey S. & Mercenier J. & Merette M., 2008. "Population Ageing, Time allocation and Human Capital: a General Equilibrium Analysis for Canada," Working Papers ERMES 0806, ERMES, University Paris 2.
  2. Frederick van der Ploeg, 2003. "Do Social Policies Harm Employment and Growth?," CESifo Working Paper Series 886, CESifo Group Munich.
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