Working Paper: NBER ID: w26000
Authors: Juan Carlos Conesa; Timothy J. Kehoe; Vegard M. Nygaard; Gajendran Raveendranathan
Abstract: We develop an overlapping generations general equilibrium model of the U.S. economy with heterogeneous consumers who face idiosyncratic earnings and health risk to study the implications of increasing college attainment, decreasing fertility, and increasing longevity (2005–2100). While all three trends contribute to a higher old age dependency ratio, increasing college attainment has different implications because it increases labor productivity. Decreasing fertility and increasing longevity require the government to increase the average labor tax rate from 33.5 to 47.1 percent. Increasing college attainment lowers the required tax increase by 12.0 percentage points. The labor tax rate required to balance the government budget is higher under general equilibrium than in a small open economy with a constant interest rate, because the reduction in the interest rate lowers capital income tax revenues.
Keywords: college attainment; aging; general equilibrium; labor productivity; fiscal policy
JEL Codes: H20; H51; H55; I13; J11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increasing college attainment (I23) | Labor productivity (O49) |
| Labor productivity (O49) | Labor tax revenues (H29) |
| Increasing college attainment (I23) | Government spending (H59) |
| Increasing college attainment (I23) | Tax rates (H29) |
| Decreasing fertility and increasing longevity (J19) | Labor tax rate (J89) |