Hostname: page-component-7479d7b7d-c9gpj Total loading time: 0 Render date: 2024-07-15T03:20:47.500Z Has data issue: false hasContentIssue false


Published online by Cambridge University Press:  24 August 2017

Luca Marchiori
Central Bank of Luxembourg
Olivier Pierrard
Central Bank of Luxembourg
Henri R. Sneessens*
Université du Luxembourg and Université catholique de Louvain
Address correspondence to: Henri R. Sneessens, CREA, Université du Luxembourg; IRES, Université catholique de Louvain; and IZA, Bonn, Germany; e-mail:
Get access


The historical evolution of the EU–US unemployment-rate gap is often explained in the literature in terms of asymmetric changes in labor-market institutions. There may well also be asymmetries in population aging, which may generate international capital flows and have substantial impacts on relative unemployment rates. In this paper, we ask whether the combination of institutions, aging, and capital flows explains the rise in the unemployment gap between 1960 and 2010. To this end, we set up a two-region OLG model with search unemployment in which we introduce the historical and projected changes in labor-market institutions and demographics. We show that asymmetric institutional changes alone can reproduce a large part of the historical rise in the unemployment gap. However, this result no longer holds once we add asymmetric aging in closed economies. We find this initial result again, and in an even stronger form, when we allow for international capital mobility.

Research Paper
Copyright © Université catholique de Louvain 2017 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)


The views expressed in this paper are the personal views of the authors and do not necessarily reflect those of the Banque centrale du Luxembourg or the Eurosystem.



Abowd, John M. and Allain, Laurence (1996) Compensation structure and product market competition. Annals of Economics and Statistics 41/42, 207217.Google Scholar
Adjemian, Stéphane, Bastani, Houtan, Karamé, Fréderic, Juillard, Michel, Maih, Junior, Mi-houbi, Ferhat, Perendia, George, Ratto, Marco, and Villemot, Sébastien (2011) Dynare: Reference Manual Version 4. Dynare Working Paper 1, CEPREMAP, Paris.Google Scholar
Andolfatto, David (1996) Business cycles and labor-market search. American Economic Review 86 (1), 112132.Google Scholar
Attanasio, Orazio, Kitao, Sagiri, and Violante, Giovanni L. (2007) Global demographic trends and social security reform. Journal of Monetary Economics 54 (1), 144198.Google Scholar
Aubert, Patrick and Crépon, Bruno (2003) La productivité des salariés âgés: une tentative d’estimation. Economie et Statistique 368 (1), 95119.Google Scholar
Backus, David, Henriksen, Espen, and Storesletten, Kjetil (2008) Taxes and the global allocation of capital. Journal of Monetary Economics 55 (1), 4861.Google Scholar
Bassanini, Andrea and Marianna, Pascal (2009) Looking Inside the Perpetual-Motion Machine: Job and Worker Flows in the OECD Countries. OECD Social, Employment and Migration working paper no. 95, Organisation for Economic Co-operation and Development, Paris.CrossRefGoogle Scholar
Bell, Felicitie C. and Miller, Michael L. (2005) Life Tables for the United States Social Security Area 1900–2100. Actuarial Study No. 120, U.S. Department of Health and Human Services, SSA Pub. No. 11-11536. Social Security Administration, Office of the Chief Actuary.Google Scholar
Blanchard, Olivier J. and Wolfers, Justin (2000) The role of shocks and institutions in the rise of European unemployment: The aggregate evidence. Economic Journal 110 (462), C1C33.CrossRefGoogle Scholar
Blöndal, Sveinbjörn and Scarpetta, Stefano (1998) The retirement decision in OECD countries. OECD Economics Department working paper no. 202, Paris.Google Scholar
Bongaarts, John (2004) Population aging and the rising cost of public pensions. Population and Development Review 30 (1), 123.Google Scholar
Borrowczyk-Martins, Daniel, Jolivet, Gregory, and Postel-Vinay, Fabien (2013) Accounting for endogeneity in matching function estimation. Review of Economic Dynamics 16 (3), 440451.Google Scholar
Börsch-Supan, Axel, Ludwig, Alexander, and Winter, Joachim (2006) Ageing, pension reform and capital flows: A multi-country simulation model. Economica 73 (292), 625658.Google Scholar
Bosca, Jose E., Garcia, Jose R., and Taguas, David (2005) Effective tax rates and fiscal convergence in the OECD: 1965–2001. Hacienda Publica Espanola/Rivista de Economia Publica 174 (3), 119141.Google Scholar
Capretta, James C. (2007) Global Aging and the Sustainability of Public Pension Systems: An Assessment of Reform Efforts in Twelve Developed Countries. A Report of the Aging Vulnerability Index Project, Center for Strategic and International Studies.Google Scholar
Casamatta, Georges, Cremer, Helmuth, and Pestieau, Pierre (2000) The political economy of social security. Scandinavian Journal of Economics 102 (3), 503–22.Google Scholar
Christoffel, Kai, Costain, James, de Walque, Gregory, Kuester, Keith, Linzert, Tobias, Millard, Stephen, and Pierrard, Olivier (2009a) Inflation Dynamics with Labour Market Matching: Assessing Alternative Specifications. Working paper 09-6, Federal Reserve Bank of Philadelphia.Google Scholar
Christoffel, Kai, Kuester, Keith, and Linzert, Tobias (2009b) The role of labor markets for euro area monetary policy. European Economic Review 53 (8), 908936.Google Scholar
Cornelisse, Peter A. and Goudswaard, Kees P. (2001) On the Convergence of Social Protection Systems in the European Union? MPRA paper no. 21297.Google Scholar
Crépon, Bruno, Desplatz, Rozen, and Mairesse, Jacques (2010) Price-cost margins and rent sharing: Evidence from a panel of French manufacturing firms. NBER Chapters, in Contributions in Memory of Zvi Griliches, pp. 583610.Google Scholar
Davis, Steven J., Faberman, R. Jason, Haltiwanger, John, Jarmin, Ron, and Miranda, Javier (2010) Business volatility, job destruction, and unemployment. American Economic Journal: Macroeconomics 2 (2), 259–87.Google Scholar
de la Croix, David, Pierrard, Olivier, and Sneessens, Henri R. (2013) Aging and pensions in general equilibrium: Labor market imperfections matter. Journal of Economic Dynamics and Control 37 (1), 104124.Google Scholar
Den Haan, Wouter, Ramey, Garey, and Watson, Joel (2000) Job destruction and propagation of shocks. American Economic Review 90 (3), 482498.Google Scholar
Den Haan, Wouter J. and Kaltenbrunner, Georg (2009) Anticipated growth and business cycles in matching models. Journal of Monetary Economics 56 (3), 309327.Google Scholar
Devereux, Michael P. (2007) Developments in the Taxation of Corporate Profit in the OECD since 1965: Rates, Bases and Revenues. Working paper 0704, Oxford University Centre for Business Taxation.Google Scholar
Devereux, Michael P. and Griffith, Rachel (1998) Taxes and the location of production: Evidence from a panel of US multinationals. Journal of Public Economics 68 (3), 335367.Google Scholar
Diaz-Gimenez, Javier and Diaz-Saavedra, Julian (2009) Delaying retirement in Spain. Review of Economic Dynamics 12 (1), 147167.Google Scholar
Domeij, David and Flodén, Martin (2006) Population aging and international capital flows. International Economic Review 47 (3), 10131032.Google Scholar
Dumont, Michel, Rayp, Glenn, and Willemé, Peter (2012) The bargaining position of low-skilled and high-skilled workers in a globalizing world. Labour Economics 19 (3), 312319.CrossRefGoogle Scholar
Duval, Romain (2003) The Retirement Effects of Old-Age Pension and Early Retirement Schemes in OECD Countries. OECD Economics Department working paper no. 370, OECD Publishing.CrossRefGoogle Scholar
Ebbinghaus, Bernhard and Gronwald, Mareike (2011) International Policy Diffusion or Path Dependent Adaptation? The Changing Public Private Pension Mix in Europe. Adapted paper from the Chapter published in Bernhard Ebbinghaus (Ed.): Varieties of Pension Governance. The Privatization of Pensions in Europe, Oxford: Oxford University Press.Google Scholar
European Commission (2009) “European Economy – Pension schemes and pension projections in the EU-27 Member States – 2008–2060, Volume I”. Occasional Paper 56, Oxford, Economic Policy Committee (AWG) and Directorate-General for Economic and Financial Affairs.Google Scholar
Fehr, Hans, Jokisch, Sabine, and Kotlikoff, Laurence (2003) The Developed World’s Demographic Transition – The Roles of Capital Flows, Immigration and Policy. National Bureau of Economic Research, NBER working paper 10096.Google Scholar
Flodén, Martin (2003) Public saving and policy coordination in aging economies. Scandinavian Journal of Economics 105 (3), 379400.Google Scholar
Frick, Joachim R., Grabka, Markus M., and Groh-Samberg, Olaf (2012) The impact of home production on economic inequality in Germany. Empirical Economics 43 (3), 11431169.Google Scholar
Friedman, Gladys R. (1937) Unemployment Compensation: What and Why? Social Security Board, Washington DC, March 1937. Source: webpage of Larry De Witte, Historian of the Social Security Administration, Scholar
Gertler, Mark, Sala, Luca, and Trigari, Antonella (2008) An estimated monetary DSGE model with unemployment and staggered nominal wage bargaining. Journal of Money, Credit and Banking 40 (8), 17131764.Google Scholar
Giannelli, Gianna C., Mangiavacchi, Lucia, and Piccoli, Luca (2012) GDP and the value of family caretaking: how much does Europe care? Applied Economics 44 (16), 21112131.Google Scholar
Gruber, Jonathan and Wise, David A. (1999) Social Security Programs and Retirement Around the World. Chicago: University of Chicago Press.Google Scholar
Gruber, Jonathan and Wise, David A. (2004) Social Security Programs and Retirement around the World: Microestimation. Chicago: University of Chicago Press.Google Scholar
Hajkova, Dana, Nicoletti, Giuseppe, Vartia, Laura, and Yoo, Kwang-Yeol (2006) Taxation, business environment and FDI location in OECD countries. OECD Economic Studies 2, 738.Google Scholar
Head, Allen and Smits, Karlis (2004) Capital Flows, Incomplete Markets, and the U.S. European Unemployment gap. Society for Economic Dynamics, 2004 Meeting papers.Google Scholar
IMF (2009) “World Economic Outlook Database”. International Monetary Fund, October 2009, Washington DC.Google Scholar
IMF (2010a) From Stimulus to Consolidation: Revenue and Expenditure Policies in Advanced and Emerging Economies. Prepared by the Fiscal Affairs Department, International Monetary Fund.Google Scholar
IMF (2010b) Macroeconomic Effects of Public Pension Reforms. Prepared by Philippe Karam, Dirk Muir, Joana Pereira, and Anita Tuladhar. IMF working paper 10297, International Monetary Fund.Google Scholar
Jaag, Christian, Keuschnigg, Christian, and Keuschnigg, Mirela (2010) Pension reform, retirement, and life-cycle unemployment. International Tax and Public Finance 17 (5), 556585.Google Scholar
Johnson, Richard W. and Neumark, David (1996) Wage declines among older men. Review of Economics and Statistics 78 (4), 740–48.Google Scholar
Keizer, Arjan B. (2011) Flexibility in Japanese internal labour markets: The introduction of performance-related pay. Asia Pacific Journal of Management 28 (3), 573594.Google Scholar
Klein, Michael W., Schuh, Scott, and Triest, Robert K. (2003) Job creation, job destruction, and the real exchange rate. Journal of International Economics 59 (2), 239265.Google Scholar
Kotlikoff, Laurence J. and Gokhale, Jagadeesh (1992) Estimating a firm’s age-productivity profile using the present value of workers’ earnings. Quarterly Journal of Economics 107 (4), 12151242.Google Scholar
Krueger, Dirk and Ludwig, Alexander (2007) On the consequences of demographic change for rates of returns to capital, and the distribution of wealth and welfare. Journal of Monetary Economics 54 (1), 4987.Google Scholar
Krusell, Per, Mukoyama, Toshihiko, and Sahin, Aysegul (2010) Labour-market matching with precautionary savings and aggregate fluctuations. Review of Economic Studies 77 (4), 14771507.Google Scholar
Marchiori, Luca (2011) Demographic trends and capital flows in an integrated World. Economic Modelling 28 (5), 21002120.Google Scholar
Martin, John (1996) Measures of Replacement Rates for the Purpose of International Comparisons: A Note. OECD Economic Studies, No. 26, pp. 99–116.Google Scholar
Mendoza, Enrique G., Razin, Assaf, and Tesar, Linda L. (1994) Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption. Journal of Monetary Economics 34 (3), 297323.Google Scholar
Merz, Monika (1995) Search in the labor market and the real business cycle. Journal of Monetary Economics 36 (2), 269300.Google Scholar
Mortensen, Dale and Nagypal, Eva (2007) More on unemployment and vacancy fluctuations. Review of Economic Dynamics 10 (3), 327347.Google Scholar
Mortensen, Dale T. and Pissarides, Christopher A. (1994) Job creation and job destruction in the theory of unemployment. Review of Economic Studies 61 (3), 397415.Google Scholar
Nickell, Stephen (1997) Unemployment and Labor Market Rigidities: Europe versus North America. Journal of Economic Perspectives 11 (3), 5574.Google Scholar
Nickell, Stephen, Nunziata, Luca, and Ochel, Wolfgang (2005) Unemployment in the OECD since the 1960s. What do we know? Economic Journal 115, 127.Google Scholar
Obstfeld, Maurice and Taylor, Alan M. (2003) Globalization and Capital Markets. NBER Chapters, in: Globalization in Historical Perspective, National Bureau of Economic Research Inc, pp. 121–188.Google Scholar
OECD (2009a) OECD Employment Outlook 2009: Tackling the Jobs Crisis. Organisation for Economic Co-operation and Development, Paris.Google Scholar
OECD (2009b) Pensions at a Glance: Public Policies across OECD Countries. Organization for Economic Co-operation and Development, Paris.Google Scholar
OECD (2010a) OECD Employment Outlook 2010: Moving Beyond the Jobs Crisis. Organisation for Economic Co-operation and Development, Paris.Google Scholar
OECD (2010b) OECD Tax Database: Taxation on wage income, Part I. Organisation for Economic Co-operation and Development, Paris. (See also Scholar
Ohanian, Lee, Raffo, Andrea, and Rogerson, Richard (2008) Long-term changes in labor supply and taxes: Evidence from OECD countries, 1956–2004. Journal of Monetary Economics 55 (8), 13531362.Google Scholar
Petrongolo, Barbara and Pissarides, Christopher A. (2001) Looking into the black box: A survey of the matching function. Journal of Economic Literature 39 (2), 390431.Google Scholar
Pissarides, Christopher A. (2000) Equilibrium Unemployment Theory, 2nd ed. MIT Press Books, Cambridge, US.Google Scholar
Pissarides, Christopher A. (2009) The unemployment volatility puzzle: Is wage stickiness the answer? Econometrica 77(5), 1339–1369.Google Scholar
Ríos-Rull, José-Víctor (2001) Population changes and capital accumulation: The aging of the baby boom. Advances in Macroeconomics, The B.E. Journals in Macroeconomics 1 (1), 148.Google Scholar
Shimer, Robert (2005) The cyclical behavior of equilibrium unemployment and vacancies. American Economic Review 95 (1), 2549.Google Scholar
United Nations (2010) World Population Prospects: The 2008 Revision. Department of Economic and Social Affairs, United Nations.Google Scholar
US Census (2000) “Projections of the Resident Population by Age, Sex, Race, and Hispanic Origin: 1999 to 2100 (Middle Series)”. Population Projections Program, Population Division, Issued January 13, 2000, Washington: U.S. Census Bureau.Google Scholar
Vallin, Jacques and Meslé, France (2001) Tables de mortalité françaises pour les XIXe et XXe siècles et projections pour le XXIe siècle. Données statistiques no 4, INED, Paris.Google Scholar
WDI (2006) World Development Indicators. Washington DC: World Bank.Google Scholar
Whitehouse, Edward, D'Addio, Anna, Chomik, Rafal, and Reilly, Andrew (2009) Two decades of pension reform: What has been Achieved and what remains to be done? The Geneva Papers 34 (4), 515535.Google Scholar