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Session Overview
D03: Macro Public Finance and Labor Supply
Thursday, 19/Aug/2021:
10:45am - 12:15pm

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10:45am - 11:07am

Progressive Pensions as an Incentive for Labor Force Participation

Fabian Kindermann, Veronika Pueschel

University of Regensburg, Germany

In this paper, we challenge the conventional idea that an increase in the progressivity of old-age pensions unanimously distorts the labor supply decision of households. So far, the literature has argued that higher pension progressivity leads to more redistribution and insurance provision on the one hand, but increases implicit taxes and therefore distorts labor supply choices on the other. In contrast, we show that a well-designed reform of the pension system has the potential to encourage labor force participation. We propose a progressive pension component linked to the employment decision of households, which implicitly subsidizes employment of the productivity poor. A simulation analysis in a quantitative stochastic overlapping generations model with productivity and longevity risk indicates that this positive employment effect can be sizable and welfare enhancing.

Kindermann-Progressive Pensions as an Incentive for Labor Force Participation-175.pdf

11:07am - 11:30am

Should We Revive PAYG? On The Optimal Pension System In View Of Current Economic Trends

Ed Westerhout1, Lex Meijdam2, Eduard Ponds2,3, Jan Bonenkamp3

1Fiscal Institute, Tilburg University, Netherlands, The; 2TiSEM, Tilburg University, Netherlands, The; 3APG, Netherlands, The

In many countries, both pay-as-you-go (PAYG) and funding are used to finance pensions, although the balance between the two principles differs a lot between countries. Over the last decades, many countries made a gradual transition to more funding. In this paper, we develop an analytical framework that includes three models of pension design, allowing us to study the role of efficiency aspects, redistributional aspects and political-economy aspects. We subsequently analyze the impact of several trends (a permanent decline in the rate of return on financial markets, a decline in the average rate of economic growth, decreased output volatility and increased capital market volatility) on the optimal balance between PAYG and funding. We argue that it may be optimal to revise the gradual transition to more funding and to revive PAYG.

Westerhout-Should We Revive PAYG On The Optimal Pension System-332.pdf

11:30am - 11:52am

Time to Say Goodbye: The Macroeconomic Implications of Termination Notice

Tomer Ifergane

Ben Gurion University of the Negev, Israel

Termination notice is a widely used form of labour market regulation that forces a delay upon the ending of employment relationships. I argue that termination notice and UI are complementary insurance devices which should be jointly designed and used. I describe analytically how termination notice can deliver valuable insurance for households at the cost of diminished job-creation. Termination notice also shifts a part of the burden of financing UI from households to firms and effectively acts as a subsidy for search effort to persons on the brink of job-loss. To account for these competing channels’ relative importance, I calibrate a general equilibrium model, which features both standard UI and termination notice. I decompose the different effects of termination notice on welfare, discuss the gains from using both UI and termination notice jointly, and show that welfare gains from termination notice will be larger if the worker’s bargaining power is small.

Ifergane-Time to Say Goodbye-162.pdf

11:52am - 12:15pm

Occupation-industry Mismatch in the Cross Section and the Aggregate

Saman Darougheh

Danmarks Nationalbank, Denmark

I define occupations that are employed in more industries as ``broader'' occupations. Workers in broader occupations can respond to adverse shocks to their industry by moving to better-faring sectors, and hence are less at risk of being mismatched across sectors. When they change sectors, they affect other workers in the destination sector negatively through a ``relocation externality''. I show empirically that workers in broader occupations were better insured against industry-specific shocks during the Great Recession. I then build a dynamic general equilibrium model that features broad and specialized occupations and can be used as a microfoundation of mismatch.

In the model, recessions that affect specialized occupations generate more mismatch. These recessions however do not lead to larger unemployment fluctuations. This is because the calibrated relocation externality is quite strong: roughly every job saved due to the direct effect of broadness translates to one job lost due to the relocation externality.

Darougheh-Occupation-industry Mismatch in the Cross Section and the Aggregate-418.pdf

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