Private wealth and job exit at older age: a random effects model

Hans G Bloemen

doi:10.1007/s00181-015-1016-x

Abstract

Private wealth holdings are likely to become an increasingly important determinant in the job exit decision of elderly workers. Net wealth may correlate with worker’s characteristics that also determine the exit out of a job. It is therefore important to include a rich set of observed characteristics in an empirical model for retirement in order to measure the (marginal) effect of wealth on the job exit rate. But even with a rich set of regressors, the question remains whether there are time-invariant unobservable worker’s characteristics that affect both net wealth and the job exit rate. We specify a simultaneous equations model for job exit transitions with multiple destinations, net wealth, and the initial labour market state. The job exit rates and the net wealth equation contain random effects. We allow for correlation between the random effects of job exit and net wealth, and the initial labour market state. As instruments for wealth, we use survey information that measures ‘shocks’, like shocks to the household’s financial situation during the previous year. Results show an upward bias in the effect of net liquid wealth on retirement, but a small bias and a positive causal effect if net total wealth (including housing equity and mortgage debt) is used. Both measures of wealth show a significant positive effect on retirement. For an average individual with age 58, an increase in net liquid wealth by 64,000 euros, or in net total wealth by 110,000 euros, raises the exit rate into retirement by 1 % point.

Highlights

While population ageing puts current pension systems under financial strain, older cohorts accumulate more private wealth than their predecessors until just a couple of decades ago
Our aim is to set up a model framework that allows us to decompose the total effect of private wealth into a causal effect and an effect that is channelled through correlation in time-invariant unobservables
For the retirement exit rate, we find both for net liquid wealth and for net total wealth a positive and significant total effect, but results differ if we look at the decomposition

Summary

Introduction

While population ageing puts current pension systems under financial strain, older cohorts accumulate more private wealth than their predecessors until just a couple of decades ago. It becomes increasingly important to know whether the private wealth holdings of households influence the flow out of work of elderly workers. Economic models (such as Kingston 2000) assign a positive impact of the level of private wealth holdings on the flow out of work. Bloemen (2011) empirically analyses the impact of the private wealth level of households on the job exit rate of elderly male workers in the Netherlands. The analysis shows that workers with higher levels of net wealth have higher retirement probabilities. Throughout the analysis the maintained assumption is that, after controlling for all the observable regressors, there is no correlation in unobservables between the level of net wealth and the job exit rate

Objectives

Results

Conclusion