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Retirement incentives, individual heterogeneity and labour transitions of employed and unemployed workers

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Abstract

In this paper we analyze the sensitivity of the labour market decisions of workers close to retirement with respect to the incentives created by public regulations. We improve upon the extensive prior literature on the effect of pension incentives on retirement in two ways. First, by modeling the transitions between employment, unemployment and retirement in a simultaneous manner, paying special attention to the transition from unemployment to retirement (which is particularly important in Spain). Second, by considering the influence of unobserved heterogeneity in the estimation of the effect of our (carefully constructed) incentive variables. Using administrative data, we find that, when properly defined, economic incentives have a strong impact on labour market decisions in Spain. Unemployment regulations are shown to be particularly influential for retirement behaviour, along with the more traditional determinants linked to the pension system. Pension variables also have a major bearing on both workers’ reemployment decisions and on the strategic actions of employers. The quantitative impact of the incentives, however, is greatly affected by the existence of unobserved heterogeneity among workers. Its omission leads to sizable biases in the assessment of the sensitivity to economic incentives, a finding that has clear consequences for the credibility of any model-based policy analysis. We confirm the importance of this potential problem in one especially interesting instance: the reform of early retirement provisions undertaken in Spain in 2002. We use a difference-in-difference approach to measure the behavioural reaction to this change, finding a large overestimation when unobserved heterogeneity is not taken into account.

Suggested Citation

  • J. Ignacio García-Pérez & Sergi Jiménez-Martín & Alfonso R. Sánchez-Martín, 2010. "Retirement incentives, individual heterogeneity and labour transitions of employed and unemployed workers," Economics Working Papers 1239, Department of Economics and Business, Universitat Pompeu Fabra.
  • Handle: RePEc:upf:upfgen:1239
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Pensiones de invalidez: el increíble programa menguante
      by Sergi Jiménez in Nada Es Gratis on 2015-01-23 13:00:02

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    Cited by:

    1. Pilar García-Gómez & Sergi Jiménez-Martín & Judit Vall Castelló, 2014. "Financial Incentives, Health, and Retirement in Spain," NBER Chapters,in: Social Security Programs and Retirement Around the World: Disability Insurance Programs and Retirement, pages 455-495 National Bureau of Economic Research, Inc.
    2. Aganbegyan, Abel Gezevich & Gorlin, Yury Mikhailovich & Dormidontova, Yulia & Maleva, Tatyana Mikhailovna & Nazarov, Vladimir, "undated". "Analysis of Factors that Influences on Decision About Retirement Age," Published Papers nvg125, Russian Presidential Academy of National Economy and Public Administration.
    3. J. García-Pérez & Alfonso Sánchez-Martín, 2015. "Fostering job search among older workers: the case for pension reform," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 4(1), pages 1-34, December.
    4. Paul Marmora & Moritz Ritter, 2015. "Unemployment and the Retirement Decisions of Older Workers," Journal of Labor Research, Springer, vol. 36(3), pages 274-290, September.

    More about this item

    Keywords

    Retirement; unemployment; incentives; Pension system; Unobserved; heterogeneity; Spain.;

    JEL classification:

    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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