The European Unemployment Puzzle: implications from population aging

We study the link between the evolving age structure of the working population and unemployment. We build a large New Keynesian OLG model with a realistic age structure, labor market frictions, sticky prices and aggregate shocks. Once calibrated to the European economies, we use this model to provide comparative statics across past and contemporaneous age structures of the working population. Thus, we quantify the extent to which the response of labor markets to adverse TFP shocks and monetary policy shocks becomes muted with the aging of the working population. Our findings have important policy implications for European labor markets and beyond. For example, the working population is expected to further age in Europe, whereas the share of young workers will remain robust in the US. Our results suggest a partial reversal of the European-US unemployment puzzle.

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