Pension reform and unemployment outcomes

ABSTRACT

This article discusses the interactions among pension reform, labor market and inter-generational distribution issues through an overlapping general equilibrium approach with imperfect labor markets. Workers with different ages are imperfectly substitutable and wages do not clear labor markets. Increasing contribution rates has a strong negative effect on welfare and unemployment, particularly, for the youth. Contrary to the popular wisdom, postponing the retirement age does not entail an increase in youth unemployment. The change in incentives induces a substitution of old-age workers by young workers who constitute the cheapest labor category. However, this scenario substantially increases the implicit tax for older workers as well as for the youngest. Finally, the middle-aged are those that benefit the most from welfare increasing reforms.

KEYWORDS:

• Pensions
• overlapping generations
• unemployment
• Tunisia

JEL CODES:

• C68
• D91
• H55
• J64

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Each generation is defined here by the year of birth.

2 The model is based on real wages.

3 The system will be discussed in detail in the next section.

4 The elasticity of substitution between all age groups is assumed to be the same.