Working Papers

Abstract: This study examines the effects of sectoral choices between formal and informal labour on household consumption and welfare in emerging economies. Analysing data from the Vietnam Household Living Standards Survey (2014-2018), we investigate two main questions: (1) What factors influence sectoral labour choices? and (2) How do these choices impact household consumption and welfare? We use a multinomial logit model to show that sectoral choices are primarily influenced by education level, gender, and marital status. The analysis extends to propensity score matching, supplemented by instrumental variable and multinomial endogenous switching regression models. Our results indicate that entering informal employment, particularly by low-skill workers, significantly reduces spending on food, while high-skill employment induces higher consumption of non-durable goods. Interestingly, informal employment increases housing wealth compared to low-skill formal employment, suggesting that informal workers invest in safe assets to mitigate high employment risks, while formal workers diversify their assets portfolio. The findings highlight the need for improved professional training and social security measures to facilitate transitions from informal to formal employment, enhancing household welfare.

Keywords: Informality, Sectoral choice, Structural change, Welfare, Propensity score matching, Multinomial endogenous switching regression

Download

2024May

A fast upper envelope scan method for discrete-continuous dynamic programming

Loretti I. Dobrescu and Akshay Shanker

Abstract: We introduce a fast upper envelope scan (FUES) method to solve and estimate dynamic programming problems with discrete and continuous choices. FUES builds on the standard endogenous grid method (EGM). EGM applied to problems with continuous and discrete choices, however, does not by itself generate the optimal solution, as the first order conditions used to retrieve the endogenous grid are necessary but not sufficient. FUES sequentially checks the secant lines between EGM candidate solution points and eliminates those not on the upper envelope of the value correspondence by only allowing discontinuities in the policy function at non-concave regions of the value correspondence. Unlike previous methods used to perform EGM in discrete-continuous dynamic models, FUES does not require the monotonicity of the policy functions or analytical information of the value function gradient. It is also computationally efficient, straightforward to implement, and for sufficiently large EGM grid sizes, guaranteed to recover the optimal solution.

Key Words: discrete and continuous choices, non-convex optimization, Euler equation, computational methods, dynamic programming

Download

2024Apr

Housing and Pensions: Complements or Substitutes in the Portfolio Allocation?

Loretti Dobrescu, Akshay Shanker, Hazel Bateman, Ben R Newell and Susan Thorp

Abstract: We study the relation between retirement savings and housing using a life cycle model of consumption and portfolio choice with risky earnings, lumpy housing with collateralized borrowing, and financial assets inside and outside pension plans. We consistently find complementarity from pensions to housing, and substitutability in reverse. The mechanism behind this asymmetry, and especially how it unfolds across genders, stems from behavioral and housing frictions that jointly drive the timing of savings: incentivizing pension savings boosts homeownership in anticipation of a prosperous retirement, while more attractive housing absorbs pension investments. Decomposing the gender differential in lifetime savings, we show that earnings inequality and preferences drive 64.2% of the wealth gap, behavioral frictions explain another 33.5%, and housing adjustment costs, that affect males and females differently, account for the rest.

Keywords: life cycle savings, portfolio choice, pensions, housing, method of moments.

Download

2024Mar

Progressive Income-Contingent Student Loans

Yue Hua and George Kudrna

Abstract: Progressive income contingent loans (ICLs) for college students, where repayment rates increase with income, may provide additional insurance against income risks after graduation. We study how the progressiveness of ICLs affects life-cycle behaviors and welfare. We document stylized facts on education in Australia, where recent reforms made ICLs more progressive. We found correlations between reforms and enrolment rates. We estimate income dynamics and found that progressive ICLs provide more insurance in the first repaying years. Lastly, we build a heterogenous-agent life-cycle model and find that progressive ICLs induce higher education attainment and welfare than non-contingent loans or linear ICLs.

Keywords: Student loans, income-contingent repayment, income dynamics, heterogeneous-agent life-cycle model

Download

2024Mar

Intergenerational Risk Sharing in Pay-As-You-Go Pension Schemes

Hélène Morsomme, Jennifer Alonso-García and Pierre Devolder

Abstract: Population ageing undermines traditional social security pension systems that combine pay-as-you-go (PAYG) and defined benefits (DB). Indeed, demographic risk, if guaranteed benefits remain unaltered, will be borne entirely by workers through increases in the contribution rate. To avoid a substantial increase of the contributions and in order to maintain simultaneously the financial sustainability and the social adequacy of the public pension system, risk sharing and automatic balancing mechanisms need to be put in place. We present a two-step convex family of risk-sharing mechanisms. The first shares the risk between contributors and retirees through adjustments in the contribution rate, used to calculate the global covered wage bill, and the benefit ratio that represents the relationship between average pensions and wages. The second step studies how the retirees’ risk should be shared between the different retirees’ generations through adjustments in the replacement rate and a sustainability factor that affects pension indexation during retirement. We perform a detailed study of the effect of social planner’s targets and solidarity weight between various generations in a deterministic and stochastic environment.

Keywords: risk-sharing, automatic balancing mechanisms, pension design, ageing

Download

2024Mar

Sustainable and Equitable Pension Reform for Emerging Economies: An Application to Indonesia

George Kudrna, John Piggott and Phitawat Poonpolkul

Abstract: This paper develops a general equilibrium overlapping generation model with heterogenous households to study pension reforms in emerging economies with large informal employment and rapid population ageing. Using Indonesia, a country in which 80% of the labour force works in the informal sector, and which confronts a 5-fold increase in the 65+ share of the population this century, as our exemplar economy, we assess, both separately and in combination, the impact of increasing the pension access age for formal labour and introducing a flat-rate social pension for informal labour. Households are differentiated by skill and employment type, and confront idiosyncratic labour income and survival shocks. The micro/household behaviours are calibrated with Indonesian Family Life Survey (IFLS) data, along with recent World Bank macro and fiscal data to target some macro moments. The benchmark model assumes tax and pension policy settings applicable solely to formal labour. We show that in a model incorporating population ageing, the combined reforms would significantly improve aggregate welfare for both groups: flexibility in late life work in the formal sector benefits those workers, while informal workers benefit from the social pension, set at 6.5% of per capita GDP. The incremental revenue requirement, taking account of both the reduced formal pension outlays and the cost of the social pension, is calculated to be about 1.5% of GDP.

Keywords: Population Ageing, Informal Labour, Retirement Policies, Social Security, Redistribution, Life Cycle, Stochastic General Equilibrium.

Download

2024Feb

Impact of Retirement and Re-employment on the Life Satisfaction of Older Adults in Korea

Do Won Kwak and Jong-Wha Lee

Abstract: An aging workforce has adversely impacted the economy in Korea, amid growing fiscal challenges associated with providing pension and healthcare for older people. The increasing elderly population has raised concerns about the diminishing quality of life among seniors. This study explores the impact of retirement and re-employment on the life satisfaction of older individuals, utilizing longitudinal data from 2008 to 2020. To address endogeneity concerns, we use statutory eligibility ages for retirement pension benefits and the expected monetary value of these benefits as instrumental variables for retirement and re-employment status. Our findings suggest that retirement leads to a significant reduction in overall life satisfaction among older individuals. Conversely, life satisfaction improves significantly when retired individuals are re-employed. This study examines the dynamic effects of retirement on life satisfaction by employing the event study framework and investigating the reversal of retirement through re-employment. The findings emphasize that the life satisfaction of older individuals can be enhanced through policies that enable them to extend their employment or pursue new opportunities after retirement.

Keywords: aging, retirement, re-employment, life satisfaction, longitudinal study, pension

Download

2024Feb

Stochastic Assessment of Special-Rate Life Annuities

Annamaria Olivieri and Daniela Tabakova

Abstract: Special-rate life annuities offer customized annuity rates, based on the lifestyle or health status of the individual. Their main purpose is to encourage the annuity demand, which is still underdeveloped in many markets; as better annuity rates are quoted for individuals showing a higher mortality profile, the number of individuals attracted by life annuities could increase. Providers should then gain larger pool sizes; however, this is possibly matched by a greater heterogeneity of the pool, due to several risk classes defined by the annuity design. Heterogeneity emerges not only in terms of different life expectancies, but also in respect of the dispersion of the lifetime distribution; indeed, situations resulting in a lower life expectancy also show greater variability of the lifetime. As it is well-known, pooling effects are reinforced by the pool size, while they are weakened by its heterogeneity, with a possibly unclear impact on the overall longevity risk to which the provider is exposed.

In this paper we investigate the longevity risk profile of an annuity pool consisting of several risk classes. We consider both the idiosyncratic and aggregate components of the risk, by modelling the random number of deaths and assuming a stochastic mortality dynamics. The heterogeneity of risk classes is represented alternatively in a deterministic and stochastic setting.

Our conclusions are in line with similar findings discussed in the literature, but obtained in a deterministic framework. Results suggest that the longevity risk profile of the provider is not significantly undermined by a greater pool heterogeneity, with a prevalence of the aggregate component whatever the pool composition.

Keywords: Underwritten annuities, Standard annuities, Enhanced annuities, Impaired annuities, Preferred risks, Substandard lives, Stochastic mortality, Longevity risk, Heterogeneity.

Download

2023Dec

Global Economic Impacts of Physical Climate Risks

Roshen Fernando and Caterina Lepore

Abstract: This paper evaluates the global economic consequences of physical climate risks under two Shared Socioeconomic Pathways (SSP 1-2.6 and SSP 2-4.5) using firm-level evidence. Firstly, we estimate the historical sectoral productivity changes from chronic climate risks (gradual changes in temperature and precipitation) and extreme climate risks (representative of heatwaves, coldwaves, droughts, and floods). Secondly, we produce forward-looking sectoral productivity changes for a global multisectoral sample of firms. For floods, these estimates account for the productivity changes from the damage to firms’ physical capital. Thirdly, we assess the macroeconomic impact of these shocks within the global, multisectoral, intertemporal general equilibrium model: G-Cubed. The results indicate that, in the absence of additional adaptation relative to that already achieved by 2020, all the economies would experience substantial losses under the two climate scenarios, and the losses would increase with global warming. The results can be useful for policymakers and practitioners interested in conducting climate risk analysis.

Keywords: Climate change, Climate risks, Extreme events, Macroeconomic modelling

Download

« first
‹ previous
1
2
3
4
5
6
7
8
9
…
next ›
last »

Search form

You are here