This document summarizes a study that analyzes the macroeconomic and welfare effects of increasing the retirement age under different pension systems (defined benefit, notional defined contribution, and funded defined contribution). The study finds that increasing the retirement age is a universally efficient reform that improves welfare. Specifically:
1) Increasing the retirement age leads to higher aggregate labor supply, though individual labor supply may decrease for some.
2) Everyone gains from the reform, as beneficiaries receive higher pensions under defined contribution systems and taxpayers pay lower taxes to support defined benefit pensions.
3) While capital per worker decreases slightly, this is mostly due to a reduction in precautionary savings rather than true economic effects.
Inequality in an OLG economy with heterogeneous cohorts and pension systemsGRAPE
Marcin Bielecki, Krzysztof Makarski and Joanna Tyrowicz
GRAPEjFAME & University of Warsaw & National Bank of Poland
International Workshop Economic Growth, Macroeconomic Dynamics and
Agents’ Heterogeneity, St. Petersburg, 2017
Welfare effects of fiscal policy in reforming the pension systemGRAPE
Most reforms of the pension systems imply substantial adjustments in between cohort and within cohort redistribution. Fiscal policy, which accompanies these changes may counteract or reinforce this redistribution. In an OLG model with uncertainty, we show that fiscal closure is crucial for determining the welfare effects of the pension system reforms as well as political support for introducing it. We analyze two sets of fiscal adjustments: fiscally neutral adjustments in the pension system (via contribution rate or replacement rate) and balancing pension system by a combination of taxes and/or public debt. We find that in general, fiscally neutral pension system reforms are more likely to yield welfare gains. Many adjustments obtain sufficient political support despite yielding aggregate welfare losses and vice versa. We show the role of the insurance motive implicit in some pension systems for determining the welfare effects of the reform and point to fiscal closures which attenuate and reinforce the relevance of this motive for determining the welfare effects.
Inequality in an OLG economy with heterogeneous cohorts and pension systemsGRAPE
Marcin Bielecki, Krzysztof Makarski and Joanna Tyrowicz
GRAPEjFAME & University of Warsaw & National Bank of Poland
International Workshop Economic Growth, Macroeconomic Dynamics and
Agents’ Heterogeneity, St. Petersburg, 2017
Welfare effects of fiscal policy in reforming the pension systemGRAPE
Most reforms of the pension systems imply substantial adjustments in between cohort and within cohort redistribution. Fiscal policy, which accompanies these changes may counteract or reinforce this redistribution. In an OLG model with uncertainty, we show that fiscal closure is crucial for determining the welfare effects of the pension system reforms as well as political support for introducing it. We analyze two sets of fiscal adjustments: fiscally neutral adjustments in the pension system (via contribution rate or replacement rate) and balancing pension system by a combination of taxes and/or public debt. We find that in general, fiscally neutral pension system reforms are more likely to yield welfare gains. Many adjustments obtain sufficient political support despite yielding aggregate welfare losses and vice versa. We show the role of the insurance motive implicit in some pension systems for determining the welfare effects of the reform and point to fiscal closures which attenuate and reinforce the relevance of this motive for determining the welfare effects.
Is the retirement age increase in Poland still necessary given the 1999 reform of the pension system? EmerytGRAPE analysis with the use of OLG model answers this question.
Evaluating welfare and economic effects of raised fertilityGRAPE
In the context of second demographic transition many countries consider pro-natalistic policies as viable solutions to the fiscal pressure stemming from longevity and declining fertility. However, increased number of births implies immediate economic costs and delayed economic gains. Moreover, quantification of these gains remains a challenge. We develop an overlapping generations model with family structure and utilize this model to quantify the effects in the increases in birth rates. We show the overall welfare and macroeconomic effects as well as distribution of these effects across cohorts. We also show how the distribution of children across families affects those estimations for a given birth rate.
Economic consequences of changing fertility. Insights from an OLG modelGRAPE
We want to use macro models to evaluate effects of differenet demographic scenarios
Demographics drives majority of the macroeconomic changes in the foreseeable future
Fiscal effects will be large and unavoidable but larger TFR can mitigate them
Strong (political) discussions about ways to prevent demographic catastrophe...
...but what is the adequate cost of family policy - even if successful?
Figures we obtain go beyond the simple calculations in Excel (forward looking agents)
Political (In)Stability of Pension System ReformsGRAPE
We analyze the political stability of welfare enhancing privatization of the social security. We consider an economy populated by overlapping generations, who vote on abolishing the funded system and replacing it with the pay-as-you-go scheme, i.e. “unprivatizing” the pension system. We show that even if abolishing the system reduces overall welfare, the distribution of benefits across cohorts along the transition path implies that some ways of “unprivatizing” social security are always politically favored
Starzenie się społeczeństwa w Polsce jest faktem i system ubezpieczeń społecznych musiał w związku z tym zostać zreformowany. W 1999 roku system emerytalny zdefiniowanego świadczenia został zmieniony na system zdefiniowanej składki - czy w tej sytuacji podniesienie wieku emerytalnego wciąż jest konieczne?
Welfare effects of fiscal policy in reforming the pension systemGRAPE
Most reforms of the pension systems imply substantial redistribution between cohorts and within cohort. Fiscal policy, which accompanies these changes may counteract or reinforce this redistribution. Moreover, the literature has argued that the insurance motive implicit in some pension systems plays a major role in determining the welfare effects of the reform: reforms otherwise improving welfare become detrimental to welfare once insurance motive is internalized. We show that this result is not universal, i.e. there exists a variety of fiscal closures which yield welfare gains and political support for a pension system reform. In an OLG model with uncertainty we analyze two sets of fiscal adjustments: fiscally neutral adjustments in the pension system (via contribution rate or replacement rate) and balancing pension system by a combination of taxes and/or public debt. We find that fiscally neutral pension system reforms are more likely to yield welfare gains. Many adjustments obtain sufficient political support despite yielding aggregate welfare losses and vice versa. Furthermore, we point to fiscal closures which attenuate and reinforce the relevance of the insurance motive in determining the welfare effects.
Welfare effects of fiscal policy in reforming the pension systemGRAPE
Joanna Tyrowicz, Olivia Komada and Krzysztof Makarski
Group for Research in APplied Economics (GRAPE)
15th International Pension Workshop
Paris, May 2017
Pension reform of 1999 Poland had important macroeconomic and wefare effects. We investigate if it can be perceived as efficient, and how the implications differ between cohorts.
On the optimal introduction of a funded pension pillarGRAPE
Jan Woźnica, Marcin Bielecki, Krzysztof Makarski and Joanna Tyrowicz Group for Research in APplied Economics (GRAPE)
15th International Pension Workshop
Paris, May 2017
Welfare effects of fiscal closures when implementing pension reformsGRAPE
This presentation covers an analysis on how do fiscal closures matter for the welfare effects of implementing the pension reforms. We develop an OLG model and calibrate it to the case of actual reform implemented in Poland.
Inequalities in an OLG economy with heterogeneous cohorts and pension systemsGRAPE
While the inequalities of endowments are widely recognized as areas of policy intervention, the dispersion in preferences may also imply inequalities of outcomes. In this paper, we analyze the inequalities in an OLG model with obligatory pension systems. We model both policy relevant pension systems (a defined benefit system – DB – and a transition from a DB to a defined contribution system, DC). Our framework features within cohort heterogeneity of endowments (individual productivities) and heterogeneity of preferences (preference for leisure and time preference). We introduce two policy instruments, which
are widely used: a contribution cap and a minimum pension. We show four main results. First, longevity increases aggregate consumption inequalities substantially in both pension systems, whereas the effect of a pension system reform works to reinforce the consumption inequalities and reduce the
wealth inequalities. Second, the contribution cap has negligible effect on inequalities, but the role for minimum pension benefit guarantee is more pronounced. Third, the reduction in inequalities due to minimum pension benefit guarantee is achieved with virtually no effect on capital accumulation. The
fourth result and the main policy implication of our study, is demonstrating that the minimum pension benefit guarantee addresses mostly the inequalities which stem from differentiated endowments and not those that stem from differentiated preferences.
Welfare effects of fiscal policy in reforming the pension systemGRAPE
Most reforms of the pension systems imply substantial redistribution between cohorts and within a cohort. Fiscal policy, which accompanies these changes may counteract or reinforce this redistribution. Moreover, the literature has argued that the insurance motive implicit in some pension systems plays a major role in determining the welfare eects of the reform: reforms otherwise improving welfare become detrimental to welfare once insurance motive is internalized. We show that this result is not universal, i.e. there exists a variety of scal closures which yield welfare gains and political support for a pension system reform. In an OLG model with uncertainty, we analyze two sets of fiscal adjustments: fiscally neutral adjustments in the pension system (via contribution rate or replacement rate) and balancing pension system by a combination of taxes and/or public debt. We find that fiscally neutral pension system reforms are more likely to yield welfare gains. Many adjustments obtain sufficient political support despite yielding aggregate welfare losses and vice versa. Furthermore, we point to fiscal closures which attenuate and reinforce the relevance of the insurance motive in determining the welfare effects.
Is the retirement age increase in Poland still necessary given the 1999 reform of the pension system? EmerytGRAPE analysis with the use of OLG model answers this question.
Evaluating welfare and economic effects of raised fertilityGRAPE
In the context of second demographic transition many countries consider pro-natalistic policies as viable solutions to the fiscal pressure stemming from longevity and declining fertility. However, increased number of births implies immediate economic costs and delayed economic gains. Moreover, quantification of these gains remains a challenge. We develop an overlapping generations model with family structure and utilize this model to quantify the effects in the increases in birth rates. We show the overall welfare and macroeconomic effects as well as distribution of these effects across cohorts. We also show how the distribution of children across families affects those estimations for a given birth rate.
Economic consequences of changing fertility. Insights from an OLG modelGRAPE
We want to use macro models to evaluate effects of differenet demographic scenarios
Demographics drives majority of the macroeconomic changes in the foreseeable future
Fiscal effects will be large and unavoidable but larger TFR can mitigate them
Strong (political) discussions about ways to prevent demographic catastrophe...
...but what is the adequate cost of family policy - even if successful?
Figures we obtain go beyond the simple calculations in Excel (forward looking agents)
Political (In)Stability of Pension System ReformsGRAPE
We analyze the political stability of welfare enhancing privatization of the social security. We consider an economy populated by overlapping generations, who vote on abolishing the funded system and replacing it with the pay-as-you-go scheme, i.e. “unprivatizing” the pension system. We show that even if abolishing the system reduces overall welfare, the distribution of benefits across cohorts along the transition path implies that some ways of “unprivatizing” social security are always politically favored
Starzenie się społeczeństwa w Polsce jest faktem i system ubezpieczeń społecznych musiał w związku z tym zostać zreformowany. W 1999 roku system emerytalny zdefiniowanego świadczenia został zmieniony na system zdefiniowanej składki - czy w tej sytuacji podniesienie wieku emerytalnego wciąż jest konieczne?
Welfare effects of fiscal policy in reforming the pension systemGRAPE
Most reforms of the pension systems imply substantial redistribution between cohorts and within cohort. Fiscal policy, which accompanies these changes may counteract or reinforce this redistribution. Moreover, the literature has argued that the insurance motive implicit in some pension systems plays a major role in determining the welfare effects of the reform: reforms otherwise improving welfare become detrimental to welfare once insurance motive is internalized. We show that this result is not universal, i.e. there exists a variety of fiscal closures which yield welfare gains and political support for a pension system reform. In an OLG model with uncertainty we analyze two sets of fiscal adjustments: fiscally neutral adjustments in the pension system (via contribution rate or replacement rate) and balancing pension system by a combination of taxes and/or public debt. We find that fiscally neutral pension system reforms are more likely to yield welfare gains. Many adjustments obtain sufficient political support despite yielding aggregate welfare losses and vice versa. Furthermore, we point to fiscal closures which attenuate and reinforce the relevance of the insurance motive in determining the welfare effects.
Welfare effects of fiscal policy in reforming the pension systemGRAPE
Joanna Tyrowicz, Olivia Komada and Krzysztof Makarski
Group for Research in APplied Economics (GRAPE)
15th International Pension Workshop
Paris, May 2017
Pension reform of 1999 Poland had important macroeconomic and wefare effects. We investigate if it can be perceived as efficient, and how the implications differ between cohorts.
On the optimal introduction of a funded pension pillarGRAPE
Jan Woźnica, Marcin Bielecki, Krzysztof Makarski and Joanna Tyrowicz Group for Research in APplied Economics (GRAPE)
15th International Pension Workshop
Paris, May 2017
Welfare effects of fiscal closures when implementing pension reformsGRAPE
This presentation covers an analysis on how do fiscal closures matter for the welfare effects of implementing the pension reforms. We develop an OLG model and calibrate it to the case of actual reform implemented in Poland.
Inequalities in an OLG economy with heterogeneous cohorts and pension systemsGRAPE
While the inequalities of endowments are widely recognized as areas of policy intervention, the dispersion in preferences may also imply inequalities of outcomes. In this paper, we analyze the inequalities in an OLG model with obligatory pension systems. We model both policy relevant pension systems (a defined benefit system – DB – and a transition from a DB to a defined contribution system, DC). Our framework features within cohort heterogeneity of endowments (individual productivities) and heterogeneity of preferences (preference for leisure and time preference). We introduce two policy instruments, which
are widely used: a contribution cap and a minimum pension. We show four main results. First, longevity increases aggregate consumption inequalities substantially in both pension systems, whereas the effect of a pension system reform works to reinforce the consumption inequalities and reduce the
wealth inequalities. Second, the contribution cap has negligible effect on inequalities, but the role for minimum pension benefit guarantee is more pronounced. Third, the reduction in inequalities due to minimum pension benefit guarantee is achieved with virtually no effect on capital accumulation. The
fourth result and the main policy implication of our study, is demonstrating that the minimum pension benefit guarantee addresses mostly the inequalities which stem from differentiated endowments and not those that stem from differentiated preferences.
Welfare effects of fiscal policy in reforming the pension systemGRAPE
Most reforms of the pension systems imply substantial redistribution between cohorts and within a cohort. Fiscal policy, which accompanies these changes may counteract or reinforce this redistribution. Moreover, the literature has argued that the insurance motive implicit in some pension systems plays a major role in determining the welfare eects of the reform: reforms otherwise improving welfare become detrimental to welfare once insurance motive is internalized. We show that this result is not universal, i.e. there exists a variety of scal closures which yield welfare gains and political support for a pension system reform. In an OLG model with uncertainty, we analyze two sets of fiscal adjustments: fiscally neutral adjustments in the pension system (via contribution rate or replacement rate) and balancing pension system by a combination of taxes and/or public debt. We find that fiscally neutral pension system reforms are more likely to yield welfare gains. Many adjustments obtain sufficient political support despite yielding aggregate welfare losses and vice versa. Furthermore, we point to fiscal closures which attenuate and reinforce the relevance of the insurance motive in determining the welfare effects.
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Getting things right: optimal tax policy with labor market dualityGilbert Mbara
We develop a dynamic general equilibrium model in which firms evade the employer contribution component of social security taxes by offering some workers non-formal contracts. When calibrated, the model yields estimates of dual labor market participation consistent with empirical evidence for the EU14 countries and the US. We investigate the optimal mix of the avoidable and unavoidable components of labor taxes and analyze the fiscal and macroeconomics effects of bringing the composition to the welfare optimum. We find that partial labor tax evasion makes tax revenues more elastic, but full tax compliance is not necessarily a welfare enhancing policy mix.
Inequalities in an OLG economy with heterogeneity within cohorts and an oblig...GRAPE
While the inequalities of endowments are widely recognized as areas of policy intervention, the dispersion in preferences may also imply inequalities of outcomes. In this paper, we analyze the inequalities in an OLG model with obligatory pension systems. We model both policy relevant pension systems (a defined benefit system — DB — and a transition from a DB to a defined contribution system, DC).
Efficiency versus insurance: The role for fiscal policy in social security pr...Oliwia Komada
Pension system reforms imply substantial redistribution between cohorts and within cohorts. They also implicitly affect the scope of risk sharing in societies. Linking pensions to individual incomes increases efficiency but reduces the insurance motive implicit in Beveridgean systems. The existing view in the literature argues that the insurance motive dominates the efficiency gains when evaluating the welfare effects. We show that this result is not universal: there exist ways to increase efficiency or compensate the loss of insurance, assuring welfare gains from pension system reform even in economies with uninsurable idiosyncratic income shocks. The fiscal closure, which necessarily accompanies the changes in the pension system, may boost efficiency and/or make up for lower insurance in the pension system. Indeed, fiscal closures inherently interact with the effects of pension system reform, counteracting or reinforcing the original effects. By analyzing a variety of fiscal closures, we reconcile our result with the earlier literature. We also study the political economy context and show that political support is feasible depending on the fiscal closure.
Political (In)Stability of Social Security ReformGRAPE
We analyze the political stability social security reforms which introduce a funded pillar (a.k.a. privatizations). We consider an economy populated by overlapping generations, which introduces a funded pillar. This reform is efficient in Kaldor-Hicks sense and has political support. Subsequently, agents vote on abolishing the funded system and replacing it with the pay-as-you-go scheme, i.e. “unprivatizing” the pension system. We show that even if abolishing the system reduces welfare in the long run, the distribution of benefits across cohorts along the transition path implies that “unprivatizing” social security is always politically favored. This suggests that property rights definition over retirement savings may be of crucial importance for determining the stability of retirement systems with a funded pillar.
Political (In)Stability of Social Security ReformGRAPE
We analyze the political stability of welfare enhancing privatization of the social security. We consider an economy populated by overlapping generations, who vote on abolishing the funded system and replacing it with the pay-as-you-go scheme, i.e. “unprivatizing” the pension system. We show that even if abolishing the system reduces overall welfare, the distribution of benefits across cohorts along the transition path implies that some ways of “unprivatizing” social security are always politically favored
Pension (In)Stability of Social Security ReformGRAPE
In this paper we consider an economy populated by overlapping generations, who vote on abolishing the funded system and replacing it with the pay-as-you-go scheme (i.e. unprivatizing the pension system). We compare politically stable and politically unstable reforms and show that even if the funded system is overall welfare enhancing, the cohort distribution of benefits along the transition path turns unprivatizing social security politically favorable.
Political (In)Stability of Social Security ReformGRAPE
We analyze the political stability of welfare enhancing privatization of the social security. We consider an economy populated by overlapping generations, who vote on abolishing the funded system and replacing it with the pay-as-you-go scheme, i.e. “unprivatizing” the pension system. We show that even if abolishing the system reduces overall welfare, the distribution of benefits across cohorts along the transition path implies that some ways of “unprivatizing” social security are always politically favored
Political (In)Stability of Social Security ReformGRAPE
In this paper we consider an economy populated by overlapping generations, which may decide about abolishing the funded system and replacing it with the pay-as- you-go scheme (i.e. unprivatizing the pension system). We compare politically stable and politically unstable reforms and show that even if the funded system is overall welfare enhancing, the cohort distribution of benefits along the transition path turns unprivatizing social security politically favorable.
We analyze political stability of social security that involves pre-funding. We employ an overlapping generations model with intra-cohort heterogeneity and introduce partial funding, which is efficient in Kaldor-Hicks sense and has majority political support. Subsequently, agents vote on capturing the accumulated pension assets, and replacing it with the pay-as-you-go scheme. We show that even if capturing assets reduces welfare in the long run, the distribution of benefits across cohorts living at the time of voting yields always sufficient political support. We explain the mechanisms which yield this counter-intuitive result. Preventing the asset capture requires switching off the fiscal channel, i.e. funding becomes politically stable if capturing of the pension assets cannot be used to reduce taxation and/or public debt.
Are incentivized old-age savings schemes effective under incomplete rationality?GRAPE
Financing consumption of the elderly in the face of the projected increase in life expectancy is a key challenge for economic policy. Moreover, standard structural models with fully rational agents suggest that about 50-60 percent of old-age consumption is financed with voluntary savings, even in the presence of a fairly generous public pension system. This is clearly inconsistent with either the data, or the alarming simulations of old-age poverty in the years to come. Old-age saving (OAS) schemes are widely used policy instruments to address this challenge, but structural evaluations of such instruments remain rare. We develop a framework with incompletely rational agents: lacking financial literacy and experiencing commitment difficulties. We study a broad selection of OAS schemes and find that they raise welfare of financially illiterate agents and to a lesser extent improve welfare of agents with a high degree of time inconsistency. They also reduce the incidence of poverty at old age. Unfortunately, these instruments are fiscally costly, induce considerable crowd-out and direct fiscal transfers mostly to those agents, who need it the least.
Eficiency versus insurance: The role for fiscal policy in social security pri...GRAPE
Pension system reforms imply substantial redistribution between cohorts and within cohorts. They also implicitly affect the scope of risk sharing in societies. Linking pensions to individual incomes increases efficiency but reduces the insurance motive implicit in Beveridgean systems. The existing view in the literature argues that the insurance motive dominates the efficiency gains when evaluating the welfare effects. We show that this result is not universal: there exist ways to increase efficiency or compensate the loss of insurance, assuring welfare gains from pension system reform even in economies with uninsurable idiosyncratic income shocks. The fiscal closure, which necessarily accompanies the changes in the pension system, may boost efficiency and/or make up for lower insurance in the pension system. Indeed, fiscal closures inherently interact with the effects of pension system reform, counteracting or reinforcing the original effects. By analyzing a variety of fiscal closures, we reconcile our result with the earlier literature. We also study the political economy context and show that political support is feasible depending on the fiscal closure
Inequality in an OLG economy with heterogeneous cohorts and pension systemsGRAPE
We analyze the consumption and wealth inequality in an OLG model with obligatory pension systems. Our framework features within cohort heterogeneity of endowments (individual productivities) and heterogeneity of preferences (preference for leisure and time preference). We allow for population aging and gradual productivity slowdown. We show four main results. First, longevity increases substantially aggregate consumption inequality and wealth inequality, regardless of the pension system features. Second, the effect of a pension system reform from a defined benefit to a defined contribution works to reinforce the consumption inequality and reduce the wealth inequality. Third, minimum pension benefits are able to counteract a part of that increase in inequality, at a fiscal cost. Fourth the minimum pension benefit guarantee addresses mostly the inequality which stems from differentiated endowments and not that which stems from heterogeneous preferences.
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The shadow of longevity – does social security reform reduce gains from increasing the retirement age
1. Introduction Model Scenarios Calibration Results
The shadow of longevity – does social security reform
reduce gains from increasing the retirement age?
with Karolina Goraus, Krzysztof Makarski and Joanna Tyrowicz
Marcin Bielecki
Faculty of Economics, University of Warsaw
First World Congress of Comparative Economics
Rome, 25-27 June 2015
1 / 30
2. Introduction Model Scenarios Calibration Results
Motivation
Major issues in pension economics:
increasing old-age dependency ratio
majority of pension systems fail to assure actuarial fairness
in most countries people tend to retire as early as legally allowed
2 / 30
3. Introduction Model Scenarios Calibration Results
Motivation
Major issues in pension economics:
increasing old-age dependency ratio
majority of pension systems fail to assure actuarial fairness
in most countries people tend to retire as early as legally allowed
Typical reform proposals
switch to DC systems and strengthen the link
between contributions and benefits
raise the social security contribution rate
cut government expenditure
increase minimum eligibility retirement age
2 / 30
6. Introduction Model Scenarios Calibration Results
Outline
1 Introduction
2 Model
3 Scenarios
4 Calibration
5 Results
5 / 30
7. Introduction Model Scenarios Calibration Results
Literature review
Two streams of literature:
1 Answering the question about optimal retirement age
Gruber and Wise (2007), Galasso (2008), Heijdra and Romp (2009)
2 Comparing different pensions system reforms: increasing retirement age
vs cut in benefits/privatization of the system/...
Auerbach et al. (1989), Hviding and Marette (1998), Fehr (2000),
Boersch-Supan and Ludwig (2010), Vogel et al. (2012)
Fehr (2000)
Macroeconomic effects of retirement age increase may depend on the existing
relation between contributions and benefits
Remaining gaps in the literature
how the macroeconomic effects differ between various pension systems?
what happens to the welfare of each affected generation and why?
6 / 30
8. Introduction Model Scenarios Calibration Results
Goals and expectations
Goal
Analyse macroeconomic and welfare implications of retirement age
increase under DB (defined benefit), NDC (notionally defined
contribution) and FDC (funded defined contribution) systems
Expectations
under DB: leisure ↓, taxes ↓, welfare?
under DC: leisure ↓, pensions ↑, welfare?
difference between FDC & NDC: pricing of capital?
Why a full model? Labor supply adjustments & GE effects
7 / 30
9. Introduction Model Scenarios Calibration Results
Model structure: consumers I
”born” at age 20 (j = 1) and live up to 100 years (J = 80)
subject to time and cohort dependent survival probability π
choose labor supply l endogenously until exogenous
retirement age ¯J (forced to retire)
8 / 30
10. Introduction Model Scenarios Calibration Results
Model structure: consumers I
”born” at age 20 (j = 1) and live up to 100 years (J = 80)
subject to time and cohort dependent survival probability π
choose labor supply l endogenously until exogenous
retirement age ¯J (forced to retire)
optimize remaining lifetime utility derived from leisure 1 − l
and consumption c
Uj,t =
J−j
s=0
δs πj+s,t+s
πj,t
u(cj+s,t+s, lj+s,t+s)
with
u(c, l) = log(cφ
(1 − l)1−φ
)
8 / 30
11. Introduction Model Scenarios Calibration Results
Model structure: consumers II
receive market clearing wage for labor
receive market clearing interest rate on private savings
receive pension income
receive unintentional bequests
pay taxes
9 / 30
12. Introduction Model Scenarios Calibration Results
Model structure: consumers II
receive market clearing wage for labor
receive market clearing interest rate on private savings
receive pension income
receive unintentional bequests
pay taxes
Subject to the budget constraint
(1 + τc
t )cj,t + sj,t = (1 − τl
t )(1 − τι
)wj,tlj,t ← labor income
+ (1 + (1 − τk
t )rt)sj−1,t−1 ← capital income
+ (1 − τl
t )pι
j,t ← pension income
+ bj,t ← bequests
− Υt ← lump-sum tax
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13. Introduction Model Scenarios Calibration Results
Model structure: producers
perfectly competitive representative firm
standard Cobb-Douglas production function
Yt = Kα
t (ztLt)1−α
profit maximization implies
wt = zt(1 − α)kα
t
rt = αkα−1
t − d
with k ≡ K
zL
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14. Introduction Model Scenarios Calibration Results
Model structure: government
collects taxes on earnings, interest and consumption (sum up to T)
spends GDP fixed share of GDP on government consumption G
collects social security contributions and pays out pensions
of DB and NDC system
subsidyt = τι
¯J−1
j=1
wj,tlj,t −
J
j= ¯J
pj,tNj,t
services debt D and maintains debt/GDP ratio fixed
lump-sum taxes Υ adjust to satisfy the govt budget constraint
Gt + subsidyt + (1 + rt)Dt−1 = Tt + Dt + Υt
J
j=1
Nj,t
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15. Introduction Model Scenarios Calibration Results
Pension systems
Defined Benefit: constructed by imposing a mandatory exogenous
contribution rate τ and an exogenous replacement rate ρ
pDB
¯J,t
= ρw ¯J−1,t−1l ¯J−1,t−1
indexed by 25% of total payroll growth
Defined Contribution: constructed by imposing a mandatory
exogenous contribution rate τ and actuarially fair individual
accounts
pDC
¯J,t
=
accumulated sum of contributions ¯J,t
expected remaining lifetime ¯J,t
Notional: contributions before retirement and pensions are indexed
by 25% of total payroll growth
Funded: contributions before retirement and pensions are indexed
by market interest rate
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16. Introduction Model Scenarios Calibration Results
What we do
What happens within each experiment?
1 Run the no policy change scenario ⇒ baseline
2 Run the policy change scenario ⇒ reform
3 For each cohort compare utility, compensate the losers from the
winners
4 If net effect positive ⇒ reform efficient
Welfare analysis – like Nishiyama & Smetters (2007)
Macroeconomic analysis
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17. Introduction Model Scenarios Calibration Results
Reforms
Three experiments:
1 DB with flat retirement age → DB with increasing retirement age
2 NDC with flat retirement age → NDC with increasing retirement age
3 FDC with flat retirement age → FDC with increasing retirement age
Increasing retirement age
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18. Introduction Model Scenarios Calibration Results
Robustness: age-productivity profile
Heterogeneity between cohorts due to age-specific productivity: wj,t = ωjwt
Deaton (1997) decomposition on Polish LFS data
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19. Introduction Model Scenarios Calibration Results
Calibration to replicate 1999 economy of Poland
Preference for leisure (φ) chosen to match participation rate of 56.8%
Impatience (δ) chosen to match interest rate of 7.4%
Replacement rate (ρ) chosen to match benefits/GDP ratio of 5%
Contributions rate (τ) chosen to match SIF deficit/GDP ratio of 0.8%
Labor income tax (τl
) set to match PIT/GDP ratio
Consumption tax (τc
) set to match VAT/GDP ratio
Capital income tax (τk
) set de iure = de facto
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20. Introduction Model Scenarios Calibration Results
Calibrated parameters
Age-productivity profile
ω – D97 ω = 1
α capital share 0.31 0.31
τl
labor income tax 0.11 0.11
τc
consumption tax 0.11 0.11
τk
capital income tax 0.19 0.19
φ leisure-consumption preference 0.578 0.526
δ discounting rate 0.998 0.979
d depreciation rate 0.045 0.045
τ social security contribution 0.060 0.060
ρ replacement rate 0.138 0.227
resulting
(dk)/y investment rate 21 21
r interest rate 7.4 7.4
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21. Introduction Model Scenarios Calibration Results
Exogenous processes in the model I
Demographic projection until 2060, after that 80 years, and after
that “new steady state”
“Births” of 20-year olds from the projection, constant afterwards
Mortality rates from the projection, constant afterwards
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22. Introduction Model Scenarios Calibration Results
Exogenous processes in the model II
Productivity growth
Labor augmenting productivity parameter z
Projection from AWG, after that “new steady state”, 1.7%
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23. Introduction Model Scenarios Calibration Results
Is the reform efficient?
Yes!
Net consumption equivalent ω – D97 ω = 1
DB 9.88% 3.70%
Transition to NDC 11.31% 4.41%
Transition to FDC 11.81% 4.70%
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31. Introduction Model Scenarios Calibration Results
... but mostly due to decrease in “precautionary savings”
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32. Introduction Model Scenarios Calibration Results
Conclusions
extending the retirement age is universally welfare enhancing
some downward adjustment in individual labor supply,
but the aggregate labor supply increases
effects on capital are “overstated”
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33. Introduction Model Scenarios Calibration Results
Thank you for your attention!
Questions or suggestions?
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