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Efficient Windows and Labor Force Reduction

  • Robin L. Lumsdaine
  • James H. Stock
  • David A. Wise

Recently many U.S. firms have offered "window" plans that provide bonuses to a group of workers if the worker retires within a specified short time span. This paper examines a window plan at a Fortune 500 firm, and addresses two main issues. First, what was the effect of the window plan on departures? Second, assuming a variety of possible firm objectives, what would be the design of an efficient window plan? These questions are addressed using the retirement model in Stock and Wise [1988a, 1988b] . The model, estimated using data for an earlier year, predicts well out-of-sample the subsequent large increase in retirements under the window plan. We find that while the firm successfully maximized departures, if its goal was to minimize either expected future wage payments or the current cost per induced retirement, the firm could have saved more with efficient plans constructed using the model. One interpretation is that the firm was primarily interested in reducing the overall size of the labor force or in retiring older employees to allow promotion of younger employees.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3369.

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Date of creation: May 1990
Date of revision:
Publication status: published as Journal of Public Economics, Vol. 43, pp. 131-159, 1990.
Handle: RePEc:nbr:nberwo:3369
Note: AG LS
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  1. Laurence J. Kotlikoff & David A. Wise, 1987. "The Incentive Effects of Private Pension Plans," NBER Chapters, in: Issues in Pension Economics, pages 283-340 National Bureau of Economic Research, Inc.
  2. Laurence J. Kotlikoff & David A. Wise, 1987. "Employee Retirement and a Firm's Pension Plan," NBER Working Papers 2323, National Bureau of Economic Research, Inc.
  3. Gary S. Fields & Olivia S. Mitchell, 1984. "Retirement, Pensions, and Social Security," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262060914, June.
  4. Zvi Bodie & John B. Shoven & David A. Wise, 1987. "Issues in Pension Economics," NBER Books, National Bureau of Economic Research, Inc, number bodi87-1, December.
  5. Jeanne M. Hogarth, 1988. "Accepting an Early Retirement Bonus an Empirical Study," Journal of Human Resources, University of Wisconsin Press, vol. 23(1), pages 21-33.
  6. Jeremy I. Bulow, 1981. "Early Retirement Pension Benefits," NBER Working Papers 0654, National Bureau of Economic Research, Inc.
  7. Lazear, Edward P, 1979. "Why Is There Mandatory Retirement?," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1261-84, December.
  8. Laurence J. Kotlikoff & David A. Wise, 1984. "Labor Compensation and the Structure of Private Pension Plans: Evidence for Contractual Versus Spot Labor Markets," NBER Working Papers 1290, National Bureau of Economic Research, Inc.
  9. Olivia S. Mitchell & Gary S. Fields, 1981. "The Effects of Pensions and Earnings on Retirement: A Review Essay," NBER Working Papers 0772, National Bureau of Economic Research, Inc.
  10. Richard V. Burkhauser, 1979. "The Pension Acceptance Decision of Older Workers," Journal of Human Resources, University of Wisconsin Press, vol. 14(1), pages 63-75.
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