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Retirement incentives, individual heterogeneity and labour transitions of employed and unemployed workers

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  • J. Ignacio García Pérez

    () (Department of Economics, Universidad Pablo Olavide, FCEA y FEDEA)

  • Sergi Jiménez Martín

    () (Universitat Pompeu Fabra, Barcelona GSE and FEDEA.)

  • Alfonso R. Sánchez Martín

    () (Department of Economics, Universidad Pablo Olavide)

Abstract

In this paper we analyze the sensitivity of the labour market decisions of workers close to retirement with respect to the incentives created by public regulations. We improve upon the extensive prior literature on the effect of pension incentives on retirement in two ways. First, by modeling the transitions between employment, unemployment and retirement in a simultaneous manner, paying special attention to the transition from unemployment to retirement (which is particularly important in Spain). Second, by considering the influence of unobserved heterogeneity in the estimation of the effect of our (carefully constructed) incentive variables. Using administrative data, we find that, when properly defined, economic incentives have a strong impact on labour market decisions in Spain. Unemployment regulations are shown to be particularly influential for retirement behaviour, along with the more traditional determinants linked to the pension system. Pension variables also have a major bearing on both workers’ reemployment decisions and on the strategic actions of employers. The quantitative impact of the incentives, however, is greatly affected by the existence of unobserved heterogeneity among workers. Its omission leads to sizable biases in the assessment of the sensitivity to economic incentives, a finding that has clear consequences for the credibility of any model-based policy analysis. We confirm the importance of this potential problem in one especially interesting instance: the reform of early retirement provisions undertaken in Spain in 2002. We use a difference-in-difference approach to measure the behavioural reaction to this change, finding a large overestimation when unobserved heterogeneity is not taken into account.

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Bibliographic Info

Paper provided by Universidad Pablo de Olavide, Department of Economics in its series Working Papers with number 10.10.

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Length: 37 pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:pab:wpaper:10.10

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Keywords: Retirement; unemployment; incentives; Pension system; Unobserved heterogeneity; Spain.;

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References

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  1. 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.
  2. Michele Belloni & Rob Alessie, 2008. "Retirement Choices: New Evidence for Italy," CeRP Working Papers 73, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  3. Olympia Bover & Manuel Arellano & Samuel Bentolila, 2002. "Unemployment Duration, Benefit Duration and the Business Cycle," Economic Journal, Royal Economic Society, vol. 112(479), pages 223-265, April.
  4. Pedro Mira & Victor Aguirregabiria, 2007. "Dynamic Discrete Choice Structural Models: A Survey," Working Papers wp2007_0711, CEMFI.
  5. repec:att:wimass:9430 is not listed on IDEAS
  6. Boldrin, Michele & Jiménez-Martín, Sergi & Peracchi, Franco, . "Social security and retirement in Spain," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/6043, Universidad Carlos III de Madrid.
  7. Jose Ignacio Garcia Perez, 1997. "Las tasas de salida del empleo y del desempleo en España (1978-1993)," Investigaciones Economicas, Fundación SEPI, vol. 21(1), pages 29-53, January.
  8. 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.
  9. J. Ignacio García Pérez & Alfonso R Sánchez Martín, 2008. "Social Security and the search behaviour of workers approaching retirement," Working Papers 08.03, Universidad Pablo de Olavide, Department of Economics.
  10. Sergi Jiménez-Martín & Alfonso R. Sánchez, 2003. "An evaluation of the life-cycle effects of minimum pensions on retirement behavior," Economics Working Papers 715, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2006.
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Cited by:
  1. J. Ignacio García Pérez & Alfonso R. Sánchez Mártin, 2012. "Fostering job search among older workers: the case for pension reform," Working Papers 12.09, Universidad Pablo de Olavide, Department of Economics.

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