A life-cycle analysis of ending mandatory retirement

Abstract

In this paper a life-cycle model is constructed to study the macroeconomic effects and welfare implications associated with eliminating mandatory retirement. Our short run analysis reveals that changes in welfare during the transition depend on the dynamic nature of the wage rate adjustment process. We distinguish between transitions in which the wage rate clears the labour market and transitions with a sticky wage and youth unemployment. We also examine political feasibility by measuring the popular support that this type of policy might have under the two labour market scenarios. Finally, we identify the effects that the policy has on welfare in the long run. JEL classification:

Labor-Leisure Choice: Is Everything as Straightforward as One Might Have Thought?

“…, and from (18) and (19) it clearly obeys the same law of motion on each subarc. Since the function is required to be continuous, we get…”

“…For instance, [18] models a standard labor supply structure and investigates different labor types in production and how their elasticity of substitution affects the outcome of social security and tax reforms. The study of [19] analyzes the macroeconomic and welfare effects of ending mandatory retirement within a life-cycle environment where lifetime is divided between working and retirement periods. In general, studies that use a similar labor supply structure in analyzing important issues, such as pension reforms, taxation, aging, and fertility, or studies that assume a clear career interruption channel are not scant (see, e.g., [20]- [22]).…”

“…Hence, the solution to the problem can be found by piecing together the solution of (18) and (19). In doing so, we first note the multiplier function…”

Living longer in high longevity risk

“…Their empirical findings suggest more government support for low-income individuals at retirement. By employing a life-cycle model, Koka and Kosempel (2014) present that removing mandatory retirement results in a reduction in an individual's welfare. Boldrin et al (2015) find a negative impact of increases in old age pension provided by the government on fertility rates in the USA and Europe.…”

“…Their empirical findings suggest more government support for low-income individuals at retirement. By employing a life-cycle model, Koka and Kosempel (2014) present that removing mandatory retirement results in a reduction in an individual's welfare. Boldrin et al .…”