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Education Subsidies, Social Security and Growth: The Implications of a Demographic Shock
Author(s) -
Docquier Frederic,
Michel Philippe
Publication year - 1999
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/1467-9442.00164
Subject(s) - subsidy , economics , bust , overlapping generations model , social security , shock (circulatory) , baby boom , welfare , labour economics , normative , pension , deadweight loss , work (physics) , boom , finance , market economy , political science , medicine , mechanical engineering , population , demography , environmental engineering , sociology , law , engineering
We develop a three‐period overlapping‐generations model in which individual decisions about education are the engine of growth. In this setting, we investigate the normative role of education subsidies and old age pensions. Calibrating this model on empirical data, it is shown that the case for positive pension benefits is rather weak on the optimal path. An important part of education subsidies should be financed by lump‐sum taxes on retirees. We also examine how these transfers should be adjusted in the presence of a baby boom‐baby bust demographic shock. It turns out that an appropriate policy could be to increase education when the baby‐boom generation is at work. Labor productivity will then be higher when aging peaks so that the pension bill can be financed without reducing welfare for the baby‐bust generations. JEL classification : O 41; J 24; E 62