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Education Subsidies, Social Security and Growth: The Implications of a Demographic Shock

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  • Docquier, Frederic
  • Michel, Philippe

Abstract

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. Copyright 1999 by The editors of the Scandinavian Journal of Economics.

Suggested Citation

  • Docquier, Frederic & Michel, Philippe, 1999. "Education Subsidies, Social Security and Growth: The Implications of a Demographic Shock," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(3), pages 425-440, September.
    • Handle: RePEc:bla:scandj:v:101:y:1999:i:3:p:425-40
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    Cited by:

    1. Cigno, Alessandro, 2006. "The political economy of intergenerational cooperation," Handbook on the Economics of Giving, Reciprocity and Altruism, in: S. Kolm & Jean Mercier Ythier (ed.), Handbook of the Economics of Giving, Altruism and Reciprocity, edition 1, volume 1, chapter 25, pages 1505-1558, Elsevier.
    2. Buyse, Tim & Heylen, Freddy & Van De Kerckhove, Renaat, 2017. "Pension reform in an OLG model with heterogeneous abilities," Journal of Pension Economics and Finance, Cambridge University Press, vol. 16(2), pages 144-172, April.
    3. T. Buyse & F. Heylen, 2012. "Leaving the empirical (battle)ground: Output and welfare effects of fiscal consolidation in general equilibrium," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 12/826, Ghent University, Faculty of Economics and Business Administration.
    4. Zamac , Jovan, 2005. "Winners and Losers from a Demographic Shock under Different Intergenerational Transfer Schemes," Working Paper Series 2005:13, Uppsala University, Department of Economics.
    5. Annabi, Nabil & Harvey, Simon & Lan, Yu, 2011. "Public expenditures on education, human capital and growth in Canada: An OLG model analysis," Journal of Policy Modeling, Elsevier, vol. 33(6), pages 852-865.
    6. Mohamed Bouzahzah & Frédéric Docquier & Oliver Paddison, 2002. "Retraites, croissance et inégalités en présence d'individus myopes," Economie & Prévision, La Documentation Française, vol. 155(4), pages 31-44.
    7. Docquier, Frederic & Paddison, Oliver & Pestieau, Pierre, 2007. "Optimal accumulation in an endogenous growth setting with human capital," Journal of Economic Theory, Elsevier, vol. 134(1), pages 361-378, May.
    8. Jochen Mierau & Stephen Turnovsky, 2014. "Capital accumulation and the sources of demographic change," Journal of Population Economics, Springer;European Society for Population Economics, vol. 27(3), pages 857-894, July.
    9. Simone Valente, 2005. "Tax Policy and Human Capital Formation with Public Investment in Education," Journal of Economics, Springer, vol. 86(3), pages 229-258, December.
    10. Renaat Van de Kerckhove & Freddy Heylen & Tim Buyse, 2011. "Pension reform, employment by age, and long-run growth in OECD countries," 2011 Meeting Papers 736, Society for Economic Dynamics.
    11. MARCHAND, Maurice & MICHEL, Philippe & PADDISON, Oliver & PESTIEAU, Pierre, 2003. "Optimal education subsidy and taxes in an endogenous growth model with human capital," LIDAM Discussion Papers CORE 2003019, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    12. Freddy Heylen & Renaat Van de Kerckhove, 2014. "Heterogeneous ability and the effects of fiscal policy on employment, income and welfare in general equilibrium," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 14/898, Ghent University, Faculty of Economics and Business Administration.
    13. Juan A. Rojas, 2004. "On the Interaction between Education and Social Security," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(4), pages 932-957, October.
    14. Marie-Hélène Cloutier & John Cockburn & Bernard Decaluwé, 2008. "Education and Poverty in Vietnam: a Computable General Equilibrium Analysis," Cahiers de recherche 0804, CIRPEE.
    15. Simone Valente, 2007. "Human Capital, Resource Constraints and Intergenerational Fairness," CER-ETH Economics working paper series 07/68, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    16. Tim Buyse & Freddy Heylen & Renaat Van de Kerckhove, 2013. "Pension reform, employment by age, and long-run growth," Journal of Population Economics, Springer;European Society for Population Economics, vol. 26(2), pages 769-809, April.
    17. Shindo, Yuko, 2010. "The effect of education subsidies on regional economic growth and disparities in China," Economic Modelling, Elsevier, vol. 27(5), pages 1061-1068, September.
    18. Rowena A. Pecchenino & Patricia S. Pollard, 2005. "Aging, Myopia, and the Pay-As-You-Go Public Pension Systems of the G7: A Bright Future?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(3), pages 449-470, August.
    19. Werner, Katharina & Prettner, Klaus, 2015. "Public education and R&D-based economic growth," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112997, Verein für Socialpolitik / German Economic Association.
    20. Gerdie Everaert & Freddy Heylen & Ruben Schoonackers, 2015. "Fiscal policy and TFP in the OECD: measuring direct and indirect effects," Empirical Economics, Springer, vol. 49(2), pages 605-640, September.
    21. R. Schoonackers & F. Heylen, 2011. "Fiscal Policy and TFP in the OECD: A Non-Stationary Panel Approach," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 11/701, Ghent University, Faculty of Economics and Business Administration.
    22. Heylen Freddy & Van de Kerckhove Renaat, 2013. "Employment by age, education, and economic growth: effects of fiscal policy composition in general equilibrium," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 1-55, October.
    23. Valente, Simone, 2011. "Intergenerational externalities, sustainability and welfare—The ambiguous effect of optimal policies on resource depletion," Resource and Energy Economics, Elsevier, vol. 33(4), pages 995-1014.

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