Demography, Capital Flows and Unemployment

This paper contributes to the already vast literature on demography-induced internationalcapital flows by examining the role of labor market imperfections and institutions. We setup atwo-country overlapping generations model with search unemployment, which we calibrateon EU15 and US data. Labor market imperfections are found to significantly increase thevolume of capital flows, because of stronger employment adjustments in comparison with acompetitive economy. We next exploit the model to investigate how demographicasymmetries may have contributed to unemployment and welfare changes in the recent past(1950-2010). We show that a policy reform in one country also has an impact on labormarkets in other countries when capital is mobile....