The Labour Supply Effect of the Abolition of the Earnings Rule for Older Workers in the United Kingdom

Abstract

High effective tax rates on work at and around state pension age deter participation. An example is the `earnings test' operating in several OECD countries. The United States abolished its test for the 65+ age group in 2000. The United Kingdom offers a `natural experiment' of this reform, as it abolished its test, known as the `earnings rule', in 1989. We examine the effect of this change, taking account of the opportunity to defer pension rights. Abolition of the rule raised working hours of older male workers by around 4 hours a week, with a lesser impact on women's behaviour.