In the reform of the Japanese public pension system and unemployment insurance in 1995, a wage subsidy for aged workers funded by unemployment insurance was introduced. According to time series data, the wage elasticity of the labor demand for aged employees is elastic, whereas that of the labor supply is inelastic. Hence, the subsidy increases the demand for older workers by enabling Žirms to reduce their labor costs. At the same time, it raises the take-home pay of aged workers and improves their economic welfare. This fact is conŽrmed by the estimated results of the augmented demand system for aged workers. However, because unemployment insurance is Žnancially dependent on the aging population, the contribution rates of unemployment insurance will rise in the near future.
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