Employment by age, education, and economic growth: effects of fiscal policy composition in general equilibrium

We build and parameterize a general equilibrium OLG model that explains hours worked by three active generations, education by the young, the retirement decision of older workers, and aggregate per capita growth as functions of the level and structure of taxes and government expenditures. We find that our model’s predictions match the facts remarkably well for all key variables in many OECD countries. We then use the model to investigate the effects of various fiscal policy shocks. To promote employment, especially among older workers, and economic growth, our results strongly prefer labor tax cuts targeted at older workers and higher productive government expenditures financed by a reduction of non-employment benefits and/or higher consumption taxes. We also evaluate the welfare effects for current and future generations of alternative policy changes.