Last week, we presented our paper on the impact of population aging on both the labor market and optimal monetary policy during the WeLaR Midterm Conference: "The Effects of Digitalisation, Globalisation, Climate Change, and Demographic Shifts on Labour Markets and Welfare States in the European Union," at HIVA-KU Leuven. The WeLaR research project analyzes the impact of four main changes: demographic shifts, globalisation, digitalisation, and climate change on the world of work and welfare states. We had the opportunity to present how the demographic transition due to low fertility may reduce unemployment in the long run. Many thanks to the organizers for the possibility of presenting and to all participants for their comments on our work.

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 economy, we quantify the extent to which demographic changes over the last three decades have contributed to the decline of the unemployment rate. Our findings yield important implications for the future evolution of unemployment given the anticipated further aging of the working population in Europe. We also quantify the implications for optimal monetary policy: lowering inflation volatility becomes less costly in terms of GDP and unemployment volatility, which hints that optimal monetary policy may be more hawkish in an aging society. Finally, our results also propose a partial reversal of the European-US unemployment puzzle due to the fact that the share of young workers is expected to remain robust in the US.