Labor supply elasticity and social security reform
Previous literature on social security reform has used a variety of period utility functions and calibrated values for the intertemporal elasticity of substitution (IES) in labor. In this paper, we show that the effects of social security reforms on aggregate labor supply are invariant to plausible values of the IES, but the effect of such reforms on the profile of hours over the life-cycle is highly sensitive to the IES. We first establish these results analytically in a simple partial-equilibrium setting and then demonstrate their robustness in a general equilibrium model calibrated to match key U.S. macroeconomic indicators. We find that the aggregate effects are similar regardless of the wide range of the values of IES used in calibrated economies. However, social security reform leads to a large reallocation of hours worked over the life-cycle, from early years to later working years, and the size of this reallocation significantly increases with the IES.
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