Dynamic Models of Labor Supply and Retirement

Download or read book Dynamic Models of Labor Supply and Retirement written by and published by . This book was released on 2012 with total page 208 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation contains three separate essays on the dynamic models of labor supply and retirement. The first essay documents "sharp retirement"--retirement accompanied by a discontinuous decline in labor supply--across three data sets, which previous literature found difficult to explain. I propose and estimate a life-cycle labor supply model with habit persistence wherein sharp retirement can be explained by workers quitting "cold turkey." The working habit model is consistent with the data, where workers reduce yearly labor supply by scaling back more in hours worked per week (over 50% reduction) than in weeks worked per year (20% reduction). The fixed costs approach cannot explain these trends. Counterfactuals show that reducing Social Security benefits by 20% causes individuals work an additional 8.6 months. Individuals choosing sharp retirement respond mostly on the extensive margin by delaying retirement eight months, while individuals choosing smooth retirement respond mostly on the intensive margin by increasing yearly labor supply and delaying retirement only one month. The second essay develops and estimates a Ben-Porath human capital model in which individuals make decisions on consumption, human capital investment, labor supply, and retirement, allowing both an endogenous wage process and an endogenous retirement decision. We estimate the model using the Method of Simulated Moments to match the life-cycle profiles of wages and hours from the PSID data. Counterfactuals of delaying NRA and removing Social Security earnings test show significant increases in one individual's human capital investment at old ages, which leads to over 20% increase in the wage profile near retirement. The third essay tests for asymmetric employer learning in the labor market using a three-period model with a match component of wages. When a worker makes her quit/stay decision in a labor market with three periods, she must consider the signaling effect of her decision in subsequent periods. This breaks down some implications derived from two-period models, which are mostly used in the empirical literature. I suggest two alternative hypothesis tests for asymmetric employer learning in the model. I use the NLSY79 Work-History data and find evidence of asymmetric employer learning from these tests.