Macroeconomic effects of demographic change in an OLG model for a small open economy : the case of Belgium

In the absence of behavioural adjustments, demographic change may cut off about 0.4%- point on average from the annual per capita growth rate in the next 25 years. The behavioural responses of households and firms to declining fertility and rising life expectancy may significantly change this outcome, but the sign and the size of this change are unclear. In this paper we construct and parameterize a large-scale OLG model for a small open economy to quantify (the net effect of) these behavioural adjustments. Important endogenous variables in the model are hours worked and (un)employment, investment in human and physical capital, per capita growth and inequality. Individuals differ not only by age, but also by innate ability. We calibrate the model to Belgium and find that it replicates key data since about 1960 remarkably well. Simulating the model, we observe significant (positive) behavioural adjustments by households and firms, but these do not reverse the negative arithmetical effect of projected future demographic change on per capita growth. Many of the adjustments have already taken place in previous decades. Furthermore, ongoing adjustments do not affect future domestic output due to capital outflow in a small open economy. To counter (very) poor per capita growth in the next two decades, policy changes will be necessary

Schuldafbouw door groei en werkgelegenheid

De regeringen van de meeste OESO-landen staan voor de dringende opdracht hun hoge overheidsschuld af te bouwen. Hoge schulden wegen immers op de toekomstige welvaart. De strategie tot schuldafbouw die de voorbije jaren in Europa is toegepast, faalde evenwel, in de eerste plaats omdat deze strategie de economische groei en de werkgelegenheid onderuit haalde. We pleiten voor investeringsgerichte initiatieven op korte termijn, vanwege de Europese Commissie en de landen met een lagere schuldenlast. In dit artikel wordt een pakket aan gewenste structurele maatregelen en hervormingen beschreven die de economische groei en de werkgelegenheid op langere termijn moeten dienen, en als dusdanig cruciaal zijn voor duurzame schuldafbouw

Does homeownership lead to longer unemployment spells? The role of mortgage payments

This paper examines the impact of housing tenure choice on unemployment duration in Belgium using EU-SILC micro data. We contribute to the literature in distinguishing homeowners with mortgage payments and outright homeowners. We simultaneously estimate unemployment duration by a mixed proportional hazard model, and the probability of being an outright homeowner, a homeowner with mortgage payments or a tenant by a mixed multinomial logit model. To be able to correctly identify the causal influence of different types of housing tenure on unemployment duration, we use instrumental variables. Our results show that homeowners with a mortgage exit unemployment first. Outright owners stay unemployed the longest. Tenants take an intermediate position. Moreover, our results reveal the different share of mortgage holders within the group of homeowners as a possible explanation for the discrepancy between former contributions to this literature

Houses and/or Jobs: Ownership and the Labour Market in Belgian Districts

In a number of papers A.J. Oswald (1996, 1997) argues that high rates of home ownership may imply inferior labour market outcomes. This paper tests the Oswald hypothesis in a panel of 42 Belgian districts since the 1970s. The use of data going back to 1970 allows us to embed the Oswald hypothesis in a broader model including other key determinants of employment like labour costs and productivity, the skill level of the population, and demography. Considering that ownership may be endogenous to (shocks in) employment, we use IV estimation methods. Overall, we find evidence in favour of the Oswald hypothesis. We observe that a 1 percentage point rise in the rate of home ownership in a district implies a statistically significant fall in the employment rate by about 0.3 percentage points. Our results underscore the importance of including other determinants of employment, of controlling for unobserved fixed regional and time effects, and of appropriately dealing with endogeneity. Disregarding these issues, as is often done in the macro labour literature, may imply very different estimation results. Additional estimation reveals that the size of the Oswald effect falls in the fraction of high skilled in a district.employment, home ownership, Oswald hypothesis, Belgian regions, panel data

Pension reform in an OLG model with heterogeneous abilities

We study the effects of pension reform in a four-period OLG model for an open economy where hours worked by three active generations, education of the young, the retirement decision of older workers, and aggregate growth, are all endogenous. Within each generation we distinguish individuals with high, medium or low ability to build human capital. This extension allows to investigate also the effects of pension reform on the income and welfare levels of different ability groups. Particular attention goes to the income at old-age and the welfare level of low-ability individuals. Our simulation results prefer an intelligent pay-as-you-go pension system above a fully-funded private system. When it comes to promoting employment, human capital, growth, and aggregate welfare, positive effects in a pay-as-you-go system are the strongest when it includes a tight link between individual labor income (and contributions) and the pension, and when it attaches a high weight to labor income earned as an older worker to compute the pension assessment base. Such a regime does, however, imply welfare losses for the current low-ability generations, and rising inequality in welfare. Complementing or replacing this ‘intelligent’ pay-as-you-go system by basic and/or minimum pension components is negative for aggregate welfare, employment and growth. Better is to maintain the tight link between individual labor income and the pension also for low-ability individuals, but to strongly raise their replacement rate

Een structurele hervorming van het Belgische pensioensysteem: macro-economische effecten, beleidsaanbevelingen en reflecties op de voorstellen van de Commissie Pensioenhervorming 2020-2040.

This article describes the results of recent academic research conducted at the Department of Social Economics at Ghent University concerning the macroeconomic effects of pension reform. We also formulate some important policy recommendations that can be derived from this research. Furthermore, we evaluate the propositions of the Commission Pension Reform 2020-2040 in the light of our recommendations. Our evaluation of the Commission’s propositions is mostly positive, considering the progress they imply on criteria such as working longer, pension system sustainability and inequality-reduction. We believe however that pension system reform proposals should also take into account the impact of the pension system on schooling decisions, productivity and long-run growth, and fertility. In this respect, we put forward some complementary adjustments to the Commission’s propositions

On the possibility and driving forces of secular stagnation: a general equilibrium analysis applied to Belgium

This paper investigates the possibility of today’s OECD economies entering into a very long period of poor per capita economic growth and very low real interest rates. We construct a general equilibrium model with overlapping generations of heterogeneous individuals, differing in ability and human capital, and with genetic and financial transfers from parents to children. Our model allows to study within one coherent framework the effects of those factors that are most often mentioned in the literature as possible drivers of secular stagnation: demographic change, a slowdown in the rate of technical progress, rising inequality, borrowing constraints, and downward rigidity in the real interest rate. We calibrate our model to Belgium and find that its predictions match key facts in Belgium in 1950-2009 very well. We then simulate projected future changes in technical progress and demography. In alternative scenarios we additionally impose rising inequality, borrowing constraints and/or a lower bound to the real interest rate. When we assume unchanged public policies and a modest future rate of technical progress, our conclusions about future per capita output and growth are rather pessimistic. Demographic change is by far the most influential cause of low growth. If a lower bound to the real interest rate is binding, it could considerably aggravate the problem of stagnation