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Effects of Taxes and Safety Net Pensions on life-cycle Labor Supply, Savings and Human Capital: the Case of Australia

Author

Listed:
  • Fedor Iskhakov

    () (Australian National University and ARC Center of Excellence in Population Ageing Research)

  • Michael Keane

    () (UNSW School of Economics and ARC Center of Excellence in Population Ageing Research)

Abstract

In this paper we structurally estimate a life-cycle model of consumption/savings, labor supply and retirement, using data from the Australian HILDA panel. We use the model to evaluate effects of the Australian aged pension system and tax policy on labor supply, consumption and retirement decisions. Our model accounts for human capital accumulation via learning by doing, as well as wealth accumulation and decumulation over the life cycle, uninsurable wage risk, credit constraints, a non-absorbing retirement decision, and labor market frictions. We account for the “bunching” of hours by discretizing job offers into several hours levels, allowing us to investigate labor supply on both intensive and extensive margins. Our model allows us to quantify the effects of anticipated and unanticipated tax and pension policy changes at different points of the life cycle. Our results imply that the Australian Aged Pension system as currently designed is very poorly targeted, so that means testing and other program rules could be improved.

Suggested Citation

  • Fedor Iskhakov & Michael Keane, 2018. "Effects of Taxes and Safety Net Pensions on life-cycle Labor Supply, Savings and Human Capital: the Case of Australia," Discussion Papers 2018-09, School of Economics, The University of New South Wales.
  • Handle: RePEc:swe:wpaper:2018-09
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    File URL: http://research.economics.unsw.edu.au/RePEc/papers/2018-09.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Labor supply; human capital accumulation; retirement; pensions; taxes; structural model; anticipated and unanticipated policy changes; counterfactual simulations;

    JEL classification:

    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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