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The effects of health, wealth, and wages on labor supply and retirement behavior

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  • Eric French

Abstract

This paper analyzes the effects of wages and the Social Security System on labor supply over the life cycle. I present a model of labor supply and retirement behavior that includes a saving decision, uncertainty, and a non-negativity constraint on assets. Using data from the Panel Study of Income Dynamics, I estimate life cycle profiles for labor force participation rates, hours worked, and assets. Using the Method of Simulated Moments, I match the estimated profiles to profiles simulated by a dynamic structural model. Estimated parameters produce simulated profiles that match many aspects of the estimated profiles, including the high job exit rates at ages 62 and 65. Simulations suggest that a 20% reduction in Social Security benefits would cause individuals to delay job exit from the labor market in order to develop sufficient financial assets, increasing labor force participation rates from 28% to 35 % at age 62.

Suggested Citation

  • Eric French, 2000. "The effects of health, wealth, and wages on labor supply and retirement behavior," Working Paper Series WP-00-2, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:wp-00-2
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    More about this item

    Keywords

    Social security; Labor supply; Retirement; Wealth;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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