The Effects of Health, Wealth, and Wages on Labour Supply and Retirement Behaviour

Abstract

This paper estimates a life cycle model of labour supply, retirement, and savings behaviour in which future health status and wages are uncertain. Individuals face a fixed cost of work and cannot borrow against future labour, pension, or Social Security income. The method of simulated moments is used to match the life cycle profiles of labour force participation, hours worked, and assets that are estimated from the data to those that are generated by the model. The model establishes that the tax structure of the Social Security system and pensions are key determinants of the high observed job exit rates at ages 62 and 65. Removing the tax wedge embedded in the Social Security earnings test for individuals aged 65 and older would delay job exit by almost one year. By contrast, Social Security benefit levels, health, and borrowing constraints are less important determinants of job exit at older ages. For example, reducing Social Security benefits by 20% would cause workers to delay exit from the labour force by only three months. Copyright The Review of Economic Studies Limited, 2005.

Back to Work: Expectations and Realizations of Work after Retirement

“…Even though unretirement could be optimal in a theoretical life cycle model, whether on account of uncertainty or some predictable force, many empirical analyses assume retirement is an absorbing state. Of those that relax this assumption (Berkovec and Stern 1991; Blau 1994; French 2005; Rust and Phelan 1997), only Blau (1994) and Rust and Phelan (1997) examine whether their models can predict observed re-entry rates. Although many authors have noted the existence of so-called reverse transitions in the data, rarely has unretirement been the object of direct study, perhaps because unretirement transitions were often thought to be relatively uncommon (see for example, Reimers and Honig 1993; Rust and Phelan 1997).…”

Long-Term and Spillover Effects of Health Shocks on Employment and Income

“…The effectiveness of these measures depends on the extent to which ill-health constrains the earnings capacity and employment opportunities of the 50+ population. Ill-health is frequently reported to be a leading cause of labor market withdrawal in middle-age (Bound et al 1999; Currie and Madrian 1999; Dwyer and Mitchell 1999; French 2005; Disney, Emmerson, and Wakefield 2006). However, the existing evidence base to gauge whether improved population health, or at least reduced disability, alongside improved financial incentives, could increase labor market participation is weak or incomplete in three important respects.…”

Flexible Pension Take-Up in Social Security

“…This specification makes the problem more tractable, but comes with the cost that there are no income effects in labour supply. Income effects in the retirement decision are found to be small compared to substitution effects, however, see e.g., Krueger and Pischke (1992) or French (2005).…”