Reform and Backlash to Reform: Effects of Ageing and Retirement Policy

Abstract

Using a stochastic general equilibrium model with overlapping generations, this paper studies (i) the effects on both extensive and intensive labour supply responses to changes in fertility rates, and (ii) the potential of a retirement reform to mitigate the effects of fertility changes on labour supply. In order to neutralize the effects on effective labour supply of a fertility decline, a retirement reform, designed to increase labour supply at the extensive margin, is found to simultaneously reduce labour supply at the intensive margin. This backlash to retirement reform requires the statutory retirement age to increase more than proportionally to fertility changes in order to compensate for endogenous responses of the intensity of labour supply. The robustness of this result is checked against alternative model specifications and calibrations relevant to an economic region such as Europe.