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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, revised 07 Apr 2026.
    • Handle: RePEc:fip:fedlwp:102353
    DOI: 10.20955/wp.2025.031
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    1. Adam Blandin & John Bailey Jones & Fang Yang, 2023. "Marriage and Work Among Prime-Age Men," Working Papers 2313, Federal Reserve Bank of Dallas, revised 15 Dec 2025.
    2. Serdar Ozkan ⓡ & Joachim Hubmer ⓡ & Sergio Salgado ⓡ & Elin Halvorsen ⓡ & Serdar Ozkan, 2023. "Why Are the Wealthiest So Wealthy? A Longitudinal Empirical Investigation," CESifo Working Paper Series 10324, CESifo.
    3. Andreas Fagereng & Luigi Guiso & Davide Malacrino & Luigi Pistaferri, 2020. "Heterogeneity and Persistence in Returns to Wealth," Econometrica, Econometric Society, vol. 88(1), pages 115-170, January.
    4. Jess Benhabib & Alberto Bisin, 2018. "Skewed Wealth Distributions: Theory and Empirics," Journal of Economic Literature, American Economic Association, vol. 56(4), pages 1261-1291, December.
    5. Jess Benhabib & Alberto Bisin & Mi Luo, 2019. "Wealth Distribution and Social Mobility in the US: A Quantitative Approach," American Economic Review, American Economic Association, vol. 109(5), pages 1623-1647, May.
    6. Miguel Faria-e-Castro & Samuel Jordan-Wood, 2024. "Pandemic Labor Force Participation and Net Worth Fluctuations," Review, Federal Reserve Bank of St. Louis, vol. 106(1), pages 40-58, January.
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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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