GETTING LOW EDUCATED AND OLDER PEOPLE INTO WORK: FISCAL POLICY IN AN OLG MODEL WITH HETEROGENEOUS ABILITIES

Freddy Heylen () and Renaat van de Kerckhove

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: Rising pressure on the welfare state due to aging, forces governments in all OECD countries to develop effective policies to raise employment, in particular employment among older individuals and low educated individuals. Increased sensitivity to rising inequality in society has made the challenge for policy makers only greater. In this paper we evaluate alternative fiscal policy scenarios to face this challenge. We construct and use an overlapping generations model for an open economy where individuals differ not only by age, but also by innate ability and human capital. The model allows us to study effects on aggregate employment, per capita income and welfare, as well as effects for specific age and ability groups. We show that well-considered fiscal policy changes can significantly improve macroeconomic productive efficiency, without increasing intergenerational or intragenerational welfare inequality. Our results strongly prefer a reduction in the labor tax rate on older workers and on all low-wage earners, financed by an overall reduction in non-employment benefits. These results are to be seen as long-run effects for economies at potential output.

Keywords: employment by age; employment of low educated individuals; fiscal policy; heterogeneous ability; human capital; welfare inequality; overlapping generations (OLG) (search for similar items in EconPapers)
JEL-codes: E62 H5 I28 J22 J24 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2018-05
New Economics Papers: this item is included in nep-age, nep-dge, nep-lma and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:18/946

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