Aging, Labour Market Dynamics and Fiscal Imbalances

National Bank of Poland Working Paper No. 122

35 Pages Posted: 19 Oct 2012 Last revised: 8 Jul 2016

See all articles by Luca Marchiori

Luca Marchiori

Catholic University of Louvain (UCL); Universite du Luxembourg

Olivier Pierrard

Banque Centrale du Luxembourg; IRES, UCL

Henri R. Sneessens

Catholic University of Louvain (UCL) - Institut de Recherches Economiques et Sociales (IRES); IZA Institute of Labor Economics

Date Written: October 1, 2012

Abstract

Population aging is a phenomenon common to all regions in the developed world, forcing most governments to implement structural reforms in order to avoid the development of fiscal imbalances. In Luxembourg, large inflows of – young – foreign workers generate an apparently sound public pension system, although no major structural reform has been implemented yet. In this paper, we study the interactions between demographic changes, labour market dynamics and public finance, by building an overlapping generations structure with New Open Macroeconomics and labour market frictions à la Diamond-Mortensen-Pissarides. We calibrate the model on Luxembourg data and we show that foreign labour inflows are a palliative but not a long term solution to the fiscal consequences of aging, and that only deep – and unpopular – fiscal reforms could solve the expected deficit problem. We also show that without foreign trade, foreign labour inflows would increase the domestic unemployment rate. This underlines the need to combine in a single framework the NOEM and the search and matching approaches.

Keywords: Overlapping Generations, Aging, Fiscal Imbalances

JEL Classification: D91, E24, E62, F41, J11

Suggested Citation

Marchiori, Luca and pierrard, olivier and Sneessens, Henri, Aging, Labour Market Dynamics and Fiscal Imbalances (October 1, 2012). National Bank of Poland Working Paper No. 122. Available at SSRN: https://ssrn.com/abstract=2163502 or http://dx.doi.org/10.2139/ssrn.2163502

Luca Marchiori (Contact Author)

Catholic University of Louvain (UCL) ( email )

Place Montesquieu, 3
Louvain-la-Neuve, 1348
Belgium

Universite du Luxembourg

L-1511 Luxembourg
Luxembourg

Olivier Pierrard

Banque Centrale du Luxembourg ( email )

2, boulevard Royal
Luxembourg, L-2983
Luxembourg

IRES, UCL ( email )

3, Place Montesquieu
1348 Louvain-la-Neuve
Belgium

Henri Sneessens

Catholic University of Louvain (UCL) - Institut de Recherches Economiques et Sociales (IRES) ( email )

3, Place Montesquieu
1348 Louvain-la-Neuve
Belgium
+ (32) 10 47 39 62 (Phone)
+ (32) 10 47 39 45 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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