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Social security and the search behaviour of workers approaching retirement

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  • José Ignacio García

    ()
    (Centro de Estudios Andaluces)

  • Alfonso R. Sánchez Martín

    ()
    (Universidad Pablo de Olavide)

Abstract

This paper explores the links between unemployment, retirement and their associated public insurance programs. It is a contribution to a growing body of literature focused on a better understanding of the labor behavior of advanced—age workers, which has gained importance as the pension crisis looms. The analysis combines the development of a new theoretical model and a detailed exploration of the empirical regularities using the Spanish Muestra Continua de Vidas Laborales (MCVL) dataset. The model is a extension of the standard search model, designed to reproduce the non—stationary environment faced by workers approaching retirement and to explore the interaction of unemployment benefits and retirement pensions. Via calibrated simulations we show that the basic empirical reemployment and retirement patterns can be rationalized as the optimal responses to both the labor market conditions and the institutional incentives. Generous Unemployment Benefits (for durations of up to two years) together with very significant early retirement penalties, make optimal to stay unemployed without searching for large groups of unemployed workers. This moral hazard problem can he substantially alleviated through institutional reform. Setting the early retirement penalties according to the age when the individual withdraws from the labor force (rather than when he/she claims the pension for the first time) seems particularly beneficial. It increases the labor supply, reduces the financial cost for the social security system and generate enough extra resources to compensate for the welfare loss of those unemployed directly hit by the reform.

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Bibliographic Info

Paper provided by Centro de Estudios Andaluces in its series Economic Working Papers at Centro de Estudios Andaluces with number E2008/10.

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Length: 46 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:cea:doctra:e2008_10

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Keywords: Unemployment search; job benefit; retirement;

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References

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  1. Sergi Jiménez-Mart�n & Alfonso R. Sánchez Mart�n, 2007. "An evaluation of the life cycle effects of minimum pensions on retirement behavior," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(5), pages 923-950.
  2. John Rust & Christopher Phelan, 1997. "How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets," Econometrica, Econometric Society, vol. 65(4), pages 781-832, July.
  3. Hugo Benitez-Silva & Moshe Buchinsky & Hiu-Man Chan & John Rust & Sofia Sheivasser, 1997. "An Empirical Analysis of the Social Security Disability Application, Appeal, and Award Process," Public Economics 9712001, EconWPA, revised 16 Feb 1998.
  4. Berg, G.J. van den, 1988. "Search behaviour, transitions to nonparticipation and the duration of unemployment," Research Memorandum 338, Tilburg University, Faculty of Economics and Business Administration.
  5. Narayana Kocherlakota, 2004. "Figuring out the Impact of Hidden Savings on Optimal Unemployment Insurance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 541-554, July.
  6. Eric French, 2004. "The Effects of Health, Wealth and Wages on Labor Supply and Retirement Behavior," 2004 Meeting Papers 96, Society for Economic Dynamics.
  7. van der Klaauw, Wilbert & Wolpin, Kenneth I., 2008. "Social security and the retirement and savings behavior of low-income households," Journal of Econometrics, Elsevier, vol. 145(1-2), pages 21-42, July.
  8. Frijters, Paul & van der Klaauw, Bas, 2003. "Job Search with Nonparticipation," CEPR Discussion Papers 3922, C.E.P.R. Discussion Papers.
  9. Jonathan Gruber & David A. Wise, 1999. "Social Security and Retirement around the World," NBER Books, National Bureau of Economic Research, Inc, number grub99-1.
  10. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-38, April.
  11. Joseph Stiglitz & Jungyoll Yun, 2002. "Integration of Unemployment Insurance with Retirement Insurance," NBER Working Papers 9199, National Bureau of Economic Research, Inc.
  12. Bernard Casey & Howard Oxley & Edward R. Whitehouse & Pablo Antolín & Romain Duval & Willi Leibfritz, 2003. "Policies for an Ageing Society: Recent Measures and Areas for Further Reform," OECD Economics Department Working Papers 369, OECD Publishing.
  13. Borsch-Supan, Axel, 2000. "Incentive effects of social security on labor force participation: evidence in Germany and across Europe," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 25-49, October.
  14. Hugo Benitez-Silva & Debra S. Dwyer & Frank Heiland & Warren C. Sanderson, 2006. "Retirement and Social Security Reform Expectations: A Solution to the New Early Retirement Puzzle," Department of Economics Working Papers 06-05, Stony Brook University, Department of Economics.
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Cited by:
  1. Hugo Benétez-Silva & J. Ignacio Garcéa-Pérez & Sergi Jiménez-Martén, 2011. "The Effects of Employment Uncertainty and Wealth Shocks on the Labor Supply and Claiming Behavior of Older American Workers," Working Papers 564, Barcelona Graduate School of Economics.
  2. J. Ignacio García-Pérez & Sergi Jiménez-Martín & Alfonso R. Sánchez-Martín, 2010. "Retirement incentives, individual heterogeneity and labour transitions of employed and unemployed workers," Economics Working Papers 1239, Department of Economics and Business, Universitat Pompeu Fabra.
  3. José Ignacio García Pérez, 2010. "Retirement incentives, individual heterogeneity and labour transitions of employed and unemployed workers," Economic Working Papers at Centro de Estudios Andaluces E2010/12, Centro de Estudios Andaluces.
  4. Jose Ignacio García Pérez & Alfonso R. Sánchez Martín, 2010. "Social Security and the job search behavior of workers approaching retirement," Working Papers 2010-26, FEDEA.
  5. Julian Diaz Saavedra, 2014. "Early Retirement, Social Security, and Output Gap," ThE Papers 14/01, Department of Economic Theory and Economic History of the University of Granada..
  6. Sergi Jiménez Martín & Judit Vall Castello, 2009. "Business Cycle Effects on Labour Force Transitions for Older People in Spain," Working Papers 2009-25, FEDEA.

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