1 Aging in Europe: Reforms, international diversifica- tion and behavioral reactions

This annex describes our dynamic open-economy macroeconomic model that allows us to analyze the effects of the labor market reforms on GDP and consumption per capita in an ag-ing Europe. Main feature is the specification of labor supply with an endogenous and an ex-ogenous component. While we treat the reforms and the resulting variation in the maximum labor supply as exogenous, households in our model endogenously adjust their hours worked up to that maximum and may thus counteract parts of the labor market reforms. 1. Demography Time in our model is discrete and extends from t=0,…,T. Each model period t reflects a time interval of 5 years. Our demographic projections, however, are more detailed with an annual periodicity. These detailed demographic projections form the background of our analysis. Demography is taken as exogenous. It represents one of the main driving force of our simula-tion model, in addition to exogenous changes in labor supply restrictions and pension policy changes. Households in our model economies enter economic life at age 15 which we denote by j=0. The maximum age is 100 years. Accordingly, the maximum economic age, denoted by J, is 85. We assume that households give birth between ages 0,…,jf, the age of menopause. Migra-tion is assumed to be done by the age of 15 (j=0) so that we can treat newborns and immi-grants in the economic model alike. Accordingly, in each country i, the size of population of age j in period t, Nt,j,i, is given recursively by 2 (1) it jf j ijtijtitijtijtijt MNfNjNN,0