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Demographic Uncertainty and Labour Market Imperfections in Small Open Economy

Juha Kilponen (), Helvi Kinnunen and Antti Ripatti ()
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Helvi Kinnunen: Bank of Finland

No 227, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: This paper extends Gertler's (1999) tractable overlapping generations model by allowing for imperfect labour markets and distortionary taxation. Furthermore, we allow for stochastic variation in demographic structure. The model is then used to study demographic change in a small open economy of Finland. The simulations highlight a key role played by labour market imperfections in determining a fiscal burden of ageing in defined benefit pensions systems. Higher labour market imperfections lead into considerably stronger responses of labour supply and taxes on ageing. Thus, imperfections magnify the problem associated with fiscal sustainability in ageing society. Higher labour market imperfections lead into considerably stronger responses of labour supply and taxes on ageing. Thus, imperfections magnify the problem associated with fiscal sustainability in ageing society. Stochastic simulations suggest that lengthening of working time has rather minor impact on alleviating the fiscal burden of ageing. Only a small fraction of the stochastic variation in endogenously determined contribution rate is explained by the stochastic variation in the lenght of working time. Variation in fertility rate is clearly more important.

Keywords: Demographics; Uncertainty; DSGE; Labour Markets (search for similar items in EconPapers)
JEL-codes: E27 E62 H55 (search for similar items in EconPapers)
Date: 2006-07-04
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
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