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Let's Make a Deal - the Impact of Social Security Provisions and Firm Liabilities on Early Retirement

  • Tuulia Hakola
  • Roope Uusitalo

Literature on early retirement has generally ignored firms' role in the labour market withdrawals. Yet, as it is shown in this paper, employee incentives alone cannot explain the increase in unemployment at the end of the career. Instead, we construct an implicit contracts model where we account for both the firm and the worker incentives. Displacements occur only when joint utility of the two parties are greater for displacement than for continued employment. We use a firm-worker -panel to test two implications of our model. First, we find that firms target their layoffs on employees who lose least when displaced. This targeting is more frequent in firms in financial distress and during a recession. Second, we find that a change in a disability risk affects also the displacement probability. This is due to differences in experience rating for the disability and unemployment pensions.

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Paper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 260.

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Date of creation: 09 Nov 2001
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Handle: RePEc:fer:dpaper:260
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  1. repec:att:wimass:9430 is not listed on IDEAS
  2. Hutchens, Robert, 1999. "Social Security Benefits and Employer Behavior: Evaluating Social Security Early Retirement Benefits as a Form of Unemployment Insurance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 659-78, August.
  3. Ossi Korkeamäki & Tomi Kyyrä, 2000. "Integrated Panel of Finnish Companies and Workers," Discussion Papers 226, Government Institute for Economic Research Finland (VATT).
  4. Maarten Lindeboom, 1998. "Microeconometric Analysis of the Retirement Decision: The Netherlands," OECD Economics Department Working Papers 207, OECD Publishing.
  5. James H. Stock & David A. Wise, 1988. "Pensions, The Option Value of Work, and Retirement," NBER Working Papers 2686, National Bureau of Economic Research, Inc.
  6. Feldstein, Martin S, 1978. "The Effect of Unemployment Insurance on Temporary Layoff Unemployment," American Economic Review, American Economic Association, vol. 68(5), pages 834-46, December.
  7. John Rust & Christopher Phelan, 1994. "How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets," Public Economics 9406005, EconWPA, revised 06 Jul 1994.
  8. Lumsdaine, Robin L. & Mitchell, Olivia S., 1999. "New developments in the economic analysis of retirement," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 49, pages 3261-3307 Elsevier.
  9. Hall, Robert E & Lazear, Edward P, 1984. "The Excess Sensitivity of Layoffs and Quits to Demand," Journal of Labor Economics, University of Chicago Press, vol. 2(2), pages 233-57, April.
  10. Feldstein, Martin S, 1976. "Temporary Layoffs in the Theory of Unemployment," Journal of Political Economy, University of Chicago Press, vol. 84(5), pages 937-57, October.
  11. Topel, Robert H, 1984. "Experience Rating of Unemployment Insurance and the Incidence of Unemployment," Journal of Law and Economics, University of Chicago Press, vol. 27(1), pages 61-90, April.
  12. Pablo Antolín & Stefano Scarpetta, 1998. "Microeconometric Analysis of the Retirement Decision: Germany," OECD Economics Department Working Papers 204, OECD Publishing.
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