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The effects of health, wealth, and wages on labor supply and retirement behavior

  • Eric French

This paper analyzes the effects of wages and the Social Security System on labor supply over the life cycle. I present a model of labor supply and retirement behavior that includes a saving decision, uncertainty, and a non-negativity constraint on assets. Using data from the Panel Study of Income Dynamics, I estimate life cycle profiles for labor force participation rates, hours worked, and assets. Using the Method of Simulated Moments, I match the estimated profiles to profiles simulated by a dynamic structural model. Estimated parameters produce simulated profiles that match many aspects of the estimated profiles, including the high job exit rates at ages 62 and 65. Simulations suggest that a 20% reduction in Social Security benefits would cause individuals to delay job exit from the labor market in order to develop sufficient financial assets, increasing labor force participation rates from 28% to 35 % at age 62.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-00-2.

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Date of creation: 2000
Date of revision:
Handle: RePEc:fip:fedhwp:wp-00-2
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