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Aging, labour market dynamics and fiscal imbalances

Luca Marchiori (), Olivier Pierrard () and Henri Sneessens ()

No 122, NBP Working Papers from Narodowy Bank Polski, Economic Research Department

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 (search for similar items in EconPapers)
JEL-codes: D91 E24 E62 F41 J11 (search for similar items in EconPapers)
Pages: 35
Date: 2012
New Economics Papers: this item is included in nep-age, nep-dem and nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpmis:122

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