Policy effects of the elasticity of substitution across labor types in life cycle models |
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| Affiliation: | 1. Kansas State University, United States;2. Universidad del País Vasco, UPV/EHU, Spain;1. Department of Statistics, University of Ibadan, Ibadan, Nigeria;2. Faculty of Economics and ICS, University of Navarra, Spain;1. Department of International Business, Southern Taiwan University of Science and Technology, Taiwan;2. Department of Agricultural Economics, National Taiwan University, Taiwan;3. Department of Political Economy, National Sun Yat-Sen University, Taiwan;1. Federal Reserve Board, 6333 Brocketts Crossing, Kingstowne, VA 22315, United States;2. Department of Mathematics, Temple University, Philadelphia, PA 19122, United States;3. Economic Research Department, Bank of Greece, 21 El. Venizelos Ave., 102 50 Athens, Greece;4. Leicester University and Bank of Greece, Room Astley Clarke 116, University Road, Leicester LEI 7RH, UK |
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| Abstract: | This paper investigates how the production function elasticity of substitution across different labor types impacts the results of policy analysis in multiperiod lived agent overlapping generations models. We critique and investigate the popular structure that simply assumes that workers with different age, experience or education are perfectly substitutable in production. This structure is inconsistent with empirical evidence of production complementarities. We couch our findings in the context of two types of policy reforms: a social security reform and a tax reform. These reforms were chosen in part not only because of the large interest in them, but also because of their differing effects on life cycle decisions. We find that ignoring production complementarity may influence the conclusions of policy analysis. |
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