Aging, Unemployment, and Welfare in a Life-Cycle Model with Costly Labor Market Search

41 Pages Posted: 5 Feb 2002

See all articles by Joydeep Bhattacharya

Joydeep Bhattacharya

Iowa State University - Department of Economics

Robert R. Reed III

University of Kentucky - Gatton College of Business and Economics

Date Written: October 2001

Abstract

In recent years, many countries have experienced a significant shift in demographic patterns towards the elderly. This phenomenon poses numerous challenges for the design of public pension programs and labor market policies. To better understand how public policy should be designed in response to a aging workforce, it is imperative to first make an assessment of how the lifecycle affects aggregate labor market activity, and in particular, unemployment. While much work has been done on exploring how the lifecycle influences individual labor market behavior, its impact on aggregate labor market outcomes is far less studied. This paper is an attempt at addressing this lacuna within the context of a lifecycle model with costly search and matching in the labor market. The lifecycle of workers in conjunction with frictions in the labor market produces an environment in which unemployment arises as a natural possibility and both young and old workers find themselves contemporaneously competing for the same jobs. The lifecycle is shown to have significant implications for aggregate labor market activity; it may even be responsible for an inefficient allocation of workers to jobs. Additionally, public policies designed to increase labor market participation among older workers may not necessarily enhance aggregate welfare.

Keywords: Aging, retirement, social security, search

JEL Classification: J41, J64, E24

Suggested Citation

Bhattacharya, Joydeep and Reed, Robert, Aging, Unemployment, and Welfare in a Life-Cycle Model with Costly Labor Market Search (October 2001). Available at SSRN: https://ssrn.com/abstract=298823 or http://dx.doi.org/10.2139/ssrn.298823

Joydeep Bhattacharya (Contact Author)

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States
515-294-5886 (Phone)
515-294-0221 (Fax)

Robert Reed

University of Kentucky - Gatton College of Business and Economics ( email )

Department of Economics
Lexington, KY 40506
United States