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Wage and Earnings Profiles at Older Ages

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  • Maria Casanova

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    (University of California, Los Angeles (UCLA), Department of Economics)

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    Abstract

    The inverted U shape of the lifetime wage profile is frequently taken to be a stylized fact. This implies a smooth decline in wages as workers approach retirement. Instead, this paper shows that the hourly wage of the typical older worker increases slightly with age for as long as he is employed full time. It declines discretely only when he enters partial retirement, a transitional period characterized by the prevalence of part-time work, and remains mostly at thereafter. That is, the wage path at older ages is best represented by a step function. The smoothly- declining profile often found in the literature is the result of aggregation over individuals who enter partial retirement at di_erent ages. This conclusion is robust to controlling for self-selection into partial and full retirement. More importantly, the transition out of full time work is a choice for most workers, and the subsequent wage change is endogenously determined. While standard labor supply models would rationalize the reduction in hours worked upon partial retirement as a response to an exogenously declining wage trajectory, the evidence presented in the paper indicates instead that workers choose to trade more leisure for a lower hourly wage in a context in which a better paid, full-time job is available. In other words, wages and hours are jointly determined at older ages. These findings have important implications for the analysis of saving and labor supply decisions over the life cycle.

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    File URL: http://humcap.uchicago.edu/RePEc/hka/wpaper/Casanova_main_pr_wage.pdf
    File Function: First version, January 2012
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    Bibliographic Info

    Paper provided by Human Capital and Economic Opportunity Working Group in its series Working Papers with number 2012-001.

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    Date of creation: Jan 2012
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    Handle: RePEc:hka:wpaper:2012-001

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    Related research

    Keywords: wage profile; earnings profile; wage determination; retirement;

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    References

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    1. Yongsung Chang & Sun-Bin Kim & Kyooho Kwon & Richard Rogerson, 2011. "Interpreting Labor Supply Regressions in a Model of Full- and Part-Time Work," American Economic Review, American Economic Association, vol. 101(3), pages 476-81, May.
    2. Richard Rogerson & Johanna Wallenius, 2007. "Micro and Macro Elasticities in a Life Cycle Model With Taxes," NBER Working Papers 13017, National Bureau of Economic Research, Inc.
    3. Cunha, Flavio & Heckman, James J. & Navarro, Salvador, 2004. "Separating Uncertainty from Heterogeneity in Life Cycle Earnings," IZA Discussion Papers 1437, Institute for the Study of Labor (IZA).
    4. Eric French, 2005. "The Effects of Health, Wealth, and Wages on Labour Supply and Retirement Behaviour," Review of Economic Studies, Oxford University Press, vol. 72(2), pages 395-427.
    5. Jacob A. Mincer, 1974. "Introduction to "Schooling, Experience, and Earnings"," NBER Chapters, in: Schooling, Experience, and Earnings, pages 1-4 National Bureau of Economic Research, Inc.
    6. Blundell, Richard & Brewer, Mike & Francesconi, Marco, 2007. "Job Changes and Hours Changes: Understanding the Path of Labour Supply Adjustment," IZA Discussion Papers 3044, Institute for the Study of Labor (IZA).
    7. Kevin E. Cahill & Michael D. Giandrea & Joseph F. Quinn, 2005. "Are Traditional Retirements a Thing of the Past? New Evidence on Retirement Patterns and Bridge Jobs," Working Papers 384, U.S. Bureau of Labor Statistics.
    8. Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1, May.
    9. Marjorie Honig & Giora Hanoch, 1985. "Partial Retirement as a Separate Mode of Retirement Behavior," Journal of Human Resources, University of Wisconsin Press, vol. 20(1), pages 21-46.
    10. Nicole Maestas & Julie Zissimopoulos, 2010. "How Longer Work Lives Ease the Crunch of Population Aging," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 139-60, Winter.
    11. Wooldridge, Jeffrey M., 1995. "Selection corrections for panel data models under conditional mean independence assumptions," Journal of Econometrics, Elsevier, vol. 68(1), pages 115-132, July.
    12. Johnson, Richard W & Neumark, David, 1996. "Wage Declines among Older Men," The Review of Economics and Statistics, MIT Press, vol. 78(4), pages 740-48, November.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The true life-time profile of wages
      by Economic Logician in Economic Logic on 2013-12-02 15:30:00

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