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Labor supply elasticity and social security reform

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  • Imrohoroglu, Selahattin
  • Kitao, Sagiri

Abstract

Previous literature on social security reform has used a variety of period utility functions and calibrated values for the intertemporal elasticity of substitution (IES) in labor. In this paper, we show that the effects of social security reforms on aggregate labor supply are invariant to plausible values of the IES, but the effect of such reforms on the profile of hours over the life-cycle is highly sensitive to the IES. We first establish these results analytically in a simple partial-equilibrium setting and then demonstrate their robustness in a general equilibrium model calibrated to match key U.S. macroeconomic indicators. We find that the aggregate effects are similar regardless of the wide range of the values of IES used in calibrated economies. However, social security reform leads to a large reallocation of hours worked over the life-cycle, from early years to later working years, and the size of this reallocation significantly increases with the IES.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 93 (2009)
Issue (Month): 7-8 (August)
Pages: 867-878

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Handle: RePEc:eee:pubeco:v:93:y:2009:i:7-8:p:867-878

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Web page: http://www.elsevier.com/locate/inca/505578

Related research

Keywords: Social security reform Labor supply elasticity;

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References

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  1. Hubbard, R Glenn & Judd, Kenneth L, 1987. "Social Security and Individual Welfare: Precautionary Saving, Borrowing Constraints, and the Payroll Tax," American Economic Review, American Economic Association, vol. 77(4), pages 630-46, September.
  2. Edward C. Prescott, 2004. "Why Do Americans Work So Much More Than Europeans?," Levine's Bibliography 122247000000000413, UCLA Department of Economics.
  3. Raj Chetty, 2006. "A New Method of Estimating Risk Aversion," American Economic Review, American Economic Association, vol. 96(5), pages 1821-1834, December.
  4. Selahattin Imrohoroglu & Aise Imrohoroglu, 2005. "Elimination of Social Security in a Dynastic Framework," 2005 Meeting Papers 928, Society for Economic Dynamics.
  5. HUANG, HE & IMROHOROG[caron]LU, SELAHATTIN & SARGENT, THOMAS J., 1997. "Two Computations To Fund Social Security," Macroeconomic Dynamics, Cambridge University Press, vol. 1(01), pages 7-44, January.
  6. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  7. Mariacristina De Nardi & Selahattin Imrohoroglu & Thomas J. Sargent, 1999. "Projected U.S. Demographics and Social Security," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 575-615, July.
  8. Michele Boldrin & Aldo Rustichini, 2000. "Political Equilibria with Social Security," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 41-78, January.
  9. Feldstein, Martin S, 1985. "The Optimal Level of Social Security Benefits," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 303-20, May.
  10. Imrohoroglu, Ayse & Imrohoroglu, Selahattin & Joines, Douglas H, 1995. "A Life Cycle Analysis of Social Security," Economic Theory, Springer, vol. 6(1), pages 83-114, June.
  11. Richard Blundell & Thomas MaCurdy, 1998. "Labour supply: a review of alternative approaches," IFS Working Papers W98/18, Institute for Fiscal Studies.
  12. Shinichi Nishiyama & Kent Smetters, 2005. "Does Social Security Privatization Produce Efficiency Gains?," Working Papers wp106, University of Michigan, Michigan Retirement Research Center.
  13. Hansen, G.D., 1991. "The Cyclical and Secular Behavior of the Labor Input : Comparing Efficiency Units and Hours Worked," Papers 36, California Los Angeles - Applied Econometrics.
  14. Thomas F. Cooley & Jorge Soares, 1999. "A Positive Theory of Social Security Based on Reputation," Journal of Political Economy, University of Chicago Press, vol. 107(1), pages 135-160, February.
  15. Browning, Martin & Hansen, Lars Peter & Heckman, James J., 1999. "Micro data and general equilibrium models," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 8, pages 543-633 Elsevier.
  16. Orazio P. Attanasio & Agar Brugiavini, 2003. "Social Security And Households' Saving," The Quarterly Journal of Economics, MIT Press, vol. 118(3), pages 1075-1119, August.
  17. Ayse Imrohoroglu & Selahattin Imrohoroglu & Douglas H. Joines, 2000. "Time inconsistent preferences and Social Security," Discussion Paper / Institute for Empirical Macroeconomics 136, Federal Reserve Bank of Minneapolis.
  18. Susumu Imai & Michael P. Keane, 2004. "Intertemporal Labor Supply and Human Capital Accumulation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 601-641, 05.
  19. MaCurdy, Thomas E, 1981. "An Empirical Model of Labor Supply in a Life-Cycle Setting," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1059-85, December.
  20. Orazio Attanasio & Susanne Rohwedder, 2001. "Pension wealth and household saving: evidence from pension reforms in the UK," IFS Working Papers W01/21, Institute for Fiscal Studies.
  21. Juan C. Conesa & Dirk Krueger, 1999. "Social Security Reform with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(4), pages 757-795, October.
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