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Expectations on Wealth Returns: Implications for Labor Supply During the Retirement Boom

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Abstract

We use an overlapping-generations model with incomplete markets and a frictional labor market to study how assumptions about agents’ expectations of changes in returns to wealth affect labor supply and retirement decisions. Focusing on 2020–23, when returns fluctuated sharply and retirements rose above trend, we find that when individuals internalize the dependence of returns on wealth and view changes in returns as persistent, the model generates counterfactual labor-market outcomes. Retirements fall because expectations of persistently high returns boost labor supply, outweighing wealth effects, and the model predicts retirements concentrated among the very wealthy, contrary to the microdata.

Suggested Citation

  • Serdar Birinci & Miguel Faria-e-Castro & Kurt See, 2025. "Expectations on Wealth Returns: Implications for Labor Supply During the Retirement Boom," Working Papers 2025-031, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:102353
    DOI: 10.20955/wp.2025.031
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    Keywords

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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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