Three Essays on the Macroeconomic Implications of Population Aging and the Labor Market Effects of Payroll Taxation

Abstract

<p>This dissertation is a collection of three essays on the macroeconomic implications of population aging and the labor market effects of payroll taxation. In The first essay, we develop a calibrated overlapping generations model in a closed economy setting, which we apply to the North American economy to investigate the effect on living standards of the aging baby boom. The relative scarcity of labor when baby boomers retire raises the wage-rental ratio by an amount that is sufficient to ensure that the post-baby-boom generation can enjoy a modest increase in living standards -- despite facing higher taxes. Nonetheless, the baby-boom cohort itself suffers a drop in consumption, and when the two generations are considered as a group, overall living standards fall by a modest amount. These results re robust to several changes in specification: the existence of liquidity constraints, alternative assumptions regarding individuals' expectations concerning future interest rates, and different fiscal policies concerning the tax treatment of private saving for retirement. Policy initiatives that bring significant harship today to avoid a future "crisis" are not supported by the standard overlapping generations model. In the second essay, we develop a general equilibrium model of a small open economy - calibrated to Canada - to examine some implications of population aging. First, we find that analysing the consequences of population aging in one country without taking into account the extent of aging throughout the world, one may misestimate the effect which aging may have on that country's living standards and its net foreign asset position. Second, the liquidity-constrained individuals are those whose living standards, both in the short run and in the long run, are most affected by the aging baby boom. On the whole, our analysis in this essay suggests that we should regard population aging as a serious upcoming threat to living standards. Finally, whether increases in payroll tax rates to finance the public pension system (as the elderly dependency ratio rises) are imposed on workers or firms has little effect on the impact of aging on average living standards; however, it does matter for the unemployment rate. More specifically, the firms' contribution rates to the social security programs are shown to have no influence on the natural unemployment rate, whereas increases in the employees' contribution rate raise it. The third essay uses data on the Canadian economy to investigate the empirical evidence of the incidence and unemployment effects of the employer and employee payroll taxes. We estimate a disequilibrium aggregate labor market model that allows the separate effects of payroll tax rate imposed on employers and employees to be distinguished, and use the estimated model to stimulate the impacts of payroll taxation. The results indicate that there is evidence of an asymmetric labor market effect according to whether payroll taxes levied on employees are raised. Although there is no impact on unemployment in the long run in either case - which runs somewhat counter to the predictions in the second essay - the short-run effects differ. Moreover, we find that the elasticity of labor demand (with respect to the wage rate) is 10 times (in absolute value) as large as the labor supply elasticity. As a result, most of the burden of payroll taxes -- whether levied on employers or employees -- is found to be borne by labor in the long run. Finally, it appears that we should be reluctant to place too much weight on the time span over which payroll taxes may affect unemployment in the (most widely performed) deterministic simulations. In fact, the stochastic simulation results illustrate that this time span may be much shorter.</p>