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Labor Market Search and Optimal Retirement Policy

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Author Info
Joydeep Bhattacharya
Casey B. Mulligan
Robert R. Reed III

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Abstract

A popular view about social security, dating back to its early days of inception, is that it is a means for young, unemployed workers to 'purchase' jobs from older, employed workers. The question we ask is: Can social security, by encouraging retirement and hence creating job vacancies for the young, improve the allocation of workers to jobs in the labor market? Using a standard model of labor market search, we establish that the equilibrium with no policy-induced retirement can be efficient. Even under worst-case parameterizations of our model, we find that public retirement programs pay the elderly substantially more than labor market search theory implies that their jobs are worth. An important effect, ignored by the popular view, is that the creation of a vacant job by a retirement reduces the value of other vacant jobs.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8591.

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Date of creation: Nov 2001
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Handle: RePEc:nbr:nberwo:8591

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Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search

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References listed on IDEAS
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  1. Casey B. Mulligan, 2000. "Can Monopoly Unionism Explain Publicly Induced Retirement?," NBER Working Papers 7680, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  1. Leon J.H. Bettendorf & D. Peter Broer, 2003. "Lifetime Labor Supply in a Search Model of Unemployment," Tinbergen Institute Discussion Papers 03-032/2, Tinbergen Institute. [Downloadable!]
  2. Casey B. Mulligan & Xavier Sala-i-Martin, 2002. "Social Security in theory and practice wth implications for reform," Discussion Papers 0203-01, Columbia University, Department of Economics. [Downloadable!]
  3. Hugo Benitez-Silva, 2002. "Job Search Behavior At The End Of The Life Cycle," Working Papers, Center for Retirement Research at Boston College 2002-10, Center for Retirement Research. [Downloadable!]
  4. Bhattacharya, Joydeep & Reed, Robert, 2003. "Aging, Unemployment, and Welfare in a Life-Cycle Model with Costly Labor Market Search," Staff General Research Papers 10255, Iowa State University, Department of Economics. [Downloadable!]
  5. Bhattacharya, Joydeep & Reed, Rob, 2003. "Age-Specific Employment Policies," Staff General Research Papers 10256, Iowa State University, Department of Economics. [Downloadable!]
  6. Bhattacharya, Joydeep & Reed, Robert, 2003. "A Positive Theory of the Income Redistributive Focus of Social Security," Staff General Research Papers 10681, Iowa State University, Department of Economics. [Downloadable!]
  7. Marjan, MAES, 2008. "Does the dismentlement of early retirement schemes increase unemployment in Belgium ?," Discussion Papers (ECON - Département des Sciences Economiques) 2008041, Université catholique de Louvain, Département des Sciences Economiques. [Downloadable!]
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