Essays on human capital and macroeconomic policy.

Abstract

This dissertation studies the role of endogenous human capital accumulation in evaluating tax and Social Security policies. There are number of proposals to reform Pay-as-You-Go (PAYG) Social Security system in the U.S. and the number of countries has implemented such reforms. I study the effect of macroeconomic policies on the saving behavior of agents and macroeconomic performance of the economy in the overlapping generations framework. I consider two economic environments with borrowing constraints: one with exogenous human capital and a second with human capital accumulation through time investment. The second chapter considers the options for reforming the U.S. retirement system. Baseline environments are calibrated to the U.S. tax and Social Security system. Two alternative Social Security arrangements are analyzed: (a) voluntary and (b) mandatory retirement savings accounts. I find that the welfare ranking of these alternatives depends on the endogeneity of human capital investment. Both systems are welfare improving when compared to the baseline. However, the system with mandatory (voluntary) accounts leads to lower welfare gains in the endogenous (exogenous) human capital environment. The benefits of system with voluntary retirement accounts are higher rates of return on contributions made to the system and higher level of aggregate savings. At the same time, the transition generations have to incur costs, in terms of reduced consumption or higher market hours, to implement the new system. By implementing reforms in both environments, I study behavior and welfare losses/gains of transition generations. The results of third chapter show that the level of compensation depends on the economic environment considered. The amount of resources that have to be transferred to transition generations is higher in the environment with endogenous human capital. In 1990s, several pension reforms had been adopted to insure financial sustainability of Italian retirement system. The fourth chapter studies two main features of reforms: (i) adoption of notional defined contributions formula; (ii) price indexation of benefits as compared to wage indexation prior to 1992. The reforms decrease financial obligations of pension system. I study labor market decisions of and quantify the effect of the reforms on transition generations.