Umeå University's logo

The present paper studies how to encourage longer careers by reducing labor income taxes for older workers. The analysis relies on numerical experiments within a general equilibrium overlapping generations (OLG) model that is calibrated to an average economy of the organisation for economic co-operation and development (OECD). I find that the policy can delay retirement and increase tax revenue and the capital stock if treatment occurs close to, and before, the preferred retirement age. A non-trivial share of the increased post-treatment labor supply can be explained by the substitution of hours worked from the pre-treatment career to the post-treatment career. Lowering the treatment age only leads to small changes in the aggregate labor supply, but is increasingly costly for the government in terms of forgone revenue. Tax shifting toward higher consumption taxes always increases welfare, while tax shifting toward higher capital or labor income taxes paid by younger workers only increases welfare if treatment occurs sufficiently late in the career.

We study the macroeconomic effects of four fiscal policy responses to an energy supply shock: energy vouchers to all households, energy vouchers only to low-income households, energy vouchers to non-energy goods producers, and subsidies for investments in the energy sector. The analysis is carried out in a DSGE model that explicitly includes the energy sector. Calibrating the model to Swedish data, our results show that subsidies for investment in the energy sector are the most effective instrument to reduce energy prices in the short to medium term. However, this policy is welfare-dominated by energy vouchers given to households, as it immediately compensates low-income, non-saving households in the event of a shock. Providing energy vouchers to non-energy firms prevents energy prices from falling as quickly as they would without policy intervention and is also the least desirable from a welfare perspective.

We study the potential effects on the real economy and welfare of four fiscal policy responses to an energy supply shock: energy vouchers to all households, only to low-income households, or to non-energy goods producers, and subsidies for investments in the energy sector. The analysis relies on a DSGE model that explicitly models the energy sector. Calibrating the model to Swedish data, our results show that the subsidy for the investment in energy sector is the most effective instrument to reduce the energy price in the short- to medium term. This policy is, however, welfare dominated by energy vouchers given to households as it immediately compensates low-income, non-saving households in the event of the shock. Giving the energy voucher to the non-energy firms prevents energy prices from falling as fast as they would without policy intervention. It is also the least desirable from a welfare perspective.

This paper studies the role of permanent- and transitory earnings variability for lifetime income inequality in Sweden. We fit a permanent–transitory error component model to the autocovariance structure of earnings using administrative data for 2002–2015 and minimum distance estimation. We find that permanent earnings inequality increased during the first decade and that the financial crisis of 2008 temporarily heightened earnings volatility. Using this model, we simulate pension entitlements and study lifetime income inequality conditional on the pre- and post-1990’s pension system. We find that permanent earnings differences generally contribute the most to lifetime income inequality. We conclude that the Swedish pension system provides some insurance against earnings risk, but accentuates the role of permanent earnings differences in explaining lifetime inequality.

This paper illustrates that the equity–efficiency trade-off between a redistributive, Beveridgean, pension system, and an earnings-based, Bismarckian, scheme, can collapse when accounting for labor supply effects on the extensive margins.  I introduce a general equilibrium overlapping generations model with endogenous savings, human capital formation  and  labor  supply.   The  model  is  calibrated  to  an  average  OECD  economy. The results suggest that allocating funds towards a Bismarckian pension system always reduces earnings inequality, and in some cases lifetime inequality, when compared to a Beveridgean scheme.  However, the Bismarckian scheme crowds out more human capital in the economy following a higher steady state interest rate.

Several studies find that most individuals do not understand how public pension systems function. The present paper explores how this pension illiteracy affects the outcomes of public pension reform in terms of income inequality and total labor supply. For this purpose, I introduce an overlapping generations model with endogenous savings, labor supply, and retirement. Calibrating the model to an average OECD economy, I find that a reform that increases the earnings-dependence of pension systems can reduce both lifetime inequality and labor market participation if individuals fail to account for the contribution–benefit formula in their economic decision-making. These results contrast with the conventional equity–efficiency trade-off predicted by a modelpopulated only with rational individuals.

This paper studies the effects of favorable marginal tax treatment of older workers on their optimal life-cycle labor supply, retirement timing, and savings. I develop a structural model in continuous time where the life cycle of a representative agent is divided into three distinct phases: pre-treatment, post-treatment, and retirement. Solutions for consumption/savings, labor supply/leisure, and retirement timing are then obtained by solving the model as a salvage value problem. I then calibrate the model to Swedish earnings data and find that the increased extensive margin labor supply is partially offset by a reduction in hours worked during the pre-treatment period. The total effect is however an increase in life-cycle labor supply and consumption.

Paper [I] analyzes the dynamic properties of life-cycle earnings in Sweden using microdata. We study the evolution of permanent and transitory earnings inequality over the period 2002--2015. Our data comes from administrative records gathered in the ASTRID database. We find that some features of the data do not match the predictions of the heterogeneous or restricted income profile models commonly applied in the earning dynamics literature. Instead, we estimate an alternative permanent-transitory (PT) error components model. Analyzing the covariance structure of both male and female earnings, controlling for educational background, we find that the upward trend in permanent earnings inequality observed in Sweden during the 1990s does not continue in the 2000s, and the financial crisis of 2008 did not have any major impact on the variability of earnings. We further simulate the accumulation of income pension entitlements and find that variations in pension entitlements are smaller among college-educated workers.    

Paper [II] studies the life-cycle effects of favorable marginal tax treatment on older workers' optimal life-cycle labor supply, retirement timing, and savings. I develop a structural model in continuous time where the life cycle of a representative agent is divided into three distinct phases: pre-treatment, post-treatment, and retirement. Solutions for consumption and savings, labor supply and leisure, and retirement timing are then obtained by solving the model as a salvage value problem. I then calibrate the model to Swedish earnings data and find that the increased extensive margin labor supply is partially offset by a reduction in hours worked during the pre-treatment period. The total effect, however, is an increase in life-cycle labor supply and consumption. \\

Paper [III] studies the implications of the structure of public pension programs for the trade-offs determining economic behavior over the life cycle. The economy is modeled as a continuous-time overlapping generations model with endogenous labor supply, savings, and human capital formation. Individuals differ in ability and are free to choose how much to work at each period in time and when to enter and exit the labor market. Numerical simulations provide qualitative insights that a redistributive pension system introduces opposite effects on the incentives for retirement for high- and low-skilled individuals, which leads to increased earnings inequality. This effect can, in turn, dominate reduced pension inequality such that lifetime and population-wide income inequality increase. Ultimately, the equity–efficiency trade-off is found to be difficult to characterize. \noindent \\

Paper [IV] explores the effects of pension illiteracy on aggregate labor supply and the redistributive performance of public pension systems. I consider an OLG model in continuous time populated with individuals who differ in labor productivity and pension literacy. Agents suffering from pension illiteracy fail to fully account for the structure of the pension system when planning their economic behavior over the life cycle. I find that pension illiteracy can negatively impact aggregate labor supply and increase earnings inequality and lifetime income inequality. This suggests that pension illiteracy may limit the efficiency gains of an increased correlation between individual contributions and benefits, making the equity–efficiency trade-off difficult to characterize in the context of pension reforms.

This paper explores the effects of pension illiteracy on aggregate labor supply and the redistributive performance of public pension systems. I consider an overlapping generations model in continuous time populated with individuals who differ in labor productivity and pension literacy. Agents suffering from pension illiteracy fail to fully account for the structure of the pension system when planning their economic behavior over the life cycle. In particular, I assume that myopic agents treat changes to replacement income as exogenous in the active--retired trade-off and contributions to the pension system as a pure labor income tax. I find that pension illiteracy can negatively impact aggregate labor supply and increase earnings inequality and lifetime income inequality. This suggests that pension illiteracy may limit the efficiency gains of increasing the correlation between individual contributions and benefits, making the equity--efficiency trade-off difficult to characterize in the context of pension reforms.