Dynamic Life-cycle Model Research Articles

Intra-Household Risk Sharing and Job Search over the Business Cycle

This paper studies the extent to which working couples can insure one another against cyclical fluctuations in the labor market and examines the implications of joint household decision-making for cyclical fluctuations in the unemployment rate. For this purpose, I provide a dynamic life-cycle model of households that make joint savings and job search decisions in the presence of aggregate shocks. I show that two key mechanisms are at play. The first is the added-worker effect, which leads to counter-cyclical search intensity because workers increase search intensity when their spouse becomes unemployed. The second is the comparative advantage effect, according to which couples’ job search efforts are coordinated based on the relative returns to search of each spouse. I estimate the model using data from the US Current Population Survey, and find that joint household decision-making contributes to the counter-cyclicality of women’s unemployment rate, but not for men. Moreover, joint household decision-making lowers the welfare costs of cyclicality.

Public Education Inequality and Intergenerational Mobility in an Overlapping Generations Model

Public school funding depends heavily on local property tax revenue. Consequently, low-income households have limited access to quality education in neighborhoods with high house prices. In a dynamic life-cycle model with neighborhood choice and endogenous local school quality, we show that this property tax funding mechanism reduces intergenerational mobility and accounts for the spatial correlation between house prices and mobility. A housing voucher experiment improves access to schools, with benefits that can last for multiple generations. Additionally, a policy that redistributes property tax revenues equally across schools improves mobility and welfare. However, the benefits can take generations to be realized.

Dynamic life cycle quantification of metallic elements and their circularity, efficiency, and leakages

The global consumption of metals is tremendously high and growing, a problem that calls for immediate action. This paper presents a comprehensive investigation on the anthropogenic use of 55 metallic elements in two main parts: life cycle quantification and assessment. Firstly, a dynamic life cycle model is constructed to quantify annual flows, losses, and stocks during their technical use periods, that is mainly from 1900 to 2013. The results show that the global demand for 55 metals has increased from 224 Mt/yr in 1953 to 1543 Mt/yr in 2013. Meanwhile, emerging applications have created a tremendous demand for 32 metals rarely used prior to the 1980s. Furthermore, the in-use stock of all metals, except Hg, has been increasing. The results further reveal many diverse patterns in the per capita trends of these metals (i.e. increasing (27 elements), saturating (25 elements) and decreasing (2 elements)). Based on the material flow results, this study confirms that metals are used in an extremely inefficient manner. This was found by studying three indicators (total resource efficiency, circularity, and total losses) which exist on the anthropogenic cycle level. This study not only helps to highlight the necessity of closing the loop, but also urges that more attention be paid to the leakages along the metal cycle due to the significant losses (e.g. for every unit of metal use, around 4 units have been lost on average). Furthermore, the losses at each life stage are also assessed for each metal. The anthropogenic use of metals needs to be more efficient and metal-specific solutions from the manufacturing industry are needed.

Explaining Children\u2019s Life Outcomes: Parental Socioeconomic Status, Intelligence and Neurocognitive Factors in a Dynamic Life Cycle Model

The goal of the present paper is to introduce a dynamic life cycle model that explains the reproduction of wealth and health over generations by introducing knowledge from cognitive neuroscience into the existing knowledge from the socioeconomic literature. The socioeconomic literature successfully identified the major role of socioeconomic status of parents, both as a direct and indirect effect, in the shaping and intergenerational reproduction of wealth and health. Furthermore, the importance of cognitive abilities as actor in this process has been widely studied in socioeconomic literature. A third factor that has been identified by the socioeconomic discipline is the so-called non-cognitive capabilities. This category, however, lacks a clear definition and seems to be a catchall for a collection of factors. Within the repository of these non-cognitive capabilities the construct of executive functions is an interesting and important contribution from cognitive neuroscience. The multidimensional construct of executive functioning or cognitive control (i.e. planning and formulation of objectives) and monitoring processes (i.e. influences the execution of these goals) is a valuable addition to a framework on reproduction of wealth and health over generations, because executive functions are sensitive to training. Merging insights of the socioeconomic literature and cognitive neuroscience in a life cycle model opens the opportunity of educational initiatives with regard to executive functions to break the intergenerational reproduction of poverty and deprivation.

Retirement Savings: A Tale of Decisions and Defaults

We examine the behavior of members of an industry-wide pension fund to assess both the prevalence of defaults and their impact on retirement savings. Our empirical investigations show that preferences, demographic characteristics and labor mobility matter greatly when it comes to the extent of active plan choice (or high defaulting) and overall level of pension benefits. Using a structural dynamic life-cycle model, we then evaluate the ability of these empirically motivated factors to explain retirement savings patterns. In our model, individuals decide how much to save in a setting that combines irreversible automatic enrolment with an active decision regime. After automatic enrolment, there is an initial choice between two pension plans (defined benefit vs. defined contribution), and then members decide (possibly by default) their voluntary contributions and type of investment allocation. We estimate the model using the simulated method of moments on administrative data from a large Australian pension fund. Our results show that default settings strongly influence wealth accumulation. Such settings are also highly persistent, both over time and across decisions. Overall, our findings suggest that if defaults (particularly the irreversible ones) are not carefully designed, retirement savings can be severely affected. This article is protected by copyright. All rights reserved.

Women at Work: The Impact of Welfare and Fiscal Policies in a Dynamic Labor Supply Model

We build and estimate a structural dynamic life-cycle model of household labor supply, fertility, and consumption behavior. The model features several sources of heterogeneity in household members’ characteristics and it incorporates most of the fiscal rules that affect household net income. The parameters of the model are estimated using Italian longitudinal data for the period 2004-12 in order to investigate the causes of the relatively low labor supply by married women in this country. The model matches many characteristics of the data quite well. We use the estimated model to simulate a few counterfactual fiscal and welfare policies: some of them are effective in decreasing poverty rates while increasing labor supply.

Insurance, Redistribution, and the Inequality of Lifetime Income

In this paper, we study how the tax-and-transfer system reduces the inequality of lifetime income by redistributing lifetime earnings between individuals with different skill endowments and by providing individuals with insurance against lifetime earnings risk. Based on a dynamic life-cycle model, we find that redistribution through the tax-and -transfer system offsets around half of the inequality in lifetime earnings that is due to differences in skill endowments. At the same time, taxes and transfers mitigate around 60% of the inequality in lifetime earnings that is attributable to employment and health risk. Progressive taxation of annual earnings provides little insurance against lifetime earnings risk. The lifetime insurance effects of taxation may be improved by moving to a progressive tax on lifetime earnings. Similarly, the lifetime insurance and redistributive effects of social assistance may be improved by requiring wealthy individuals to repay any social assistance received when younger.

Dynamic Effects of Educational Assortative Mating on Labor Supply

In 30% of young American couples the wife is more educated than the husband. Those women are characterized by a substantially higher employment (all else equal), which in turn amplifies income inequality across couples. Using NLSY79, we formulate and structurally estimate a dynamic life-cycle model of endogenous marriage and labor supply decisions in a collective framework. We establish that the education gap at the time of marriage, produces dynamic effects due to human capital accumulation and implied wage growth. Inequality between couples is largely driven by the persistence in labor supply choices and only slightly affected by assortative matching.

The Consequences of Abortion and Contraception Policies on Young Women's Reproductive Choices, Schooling and Labor Supply

I specify a dynamic life-cycle model of abortion, contraceptive use, schooling, and labor supply decisions of US women. I structurally estimate the model, allowing for abortion misreporting, using data from the NLSY97, aggregate abortion provider data from the Guttmacher Institute, and information on mandatory counseling restrictions at the state level. I simulate a series of policies and find that eliminating access to abortion services increases contraceptive use but decreases women’s schooling and lifetime earnings. I also find that providing free contraception would increase contraceptive use and decrease abortion rates substantially, while also leading to an increase in women’s schooling.

The impact of the correlation between health expenditure and survival probability on the demand for insurance

This paper studies the effects of health shocks on the demand for health insurance and annuities, along with precautionary saving in a dynamic life-cycle model. I argue that when the health shock can simultaneously increase health expenses and reduce longevity, rational agents would neither fully insure their uncertain health expenses nor fully annuitize their wealth because the correlation between health expenses and longevity provides a self-insurance channel for both uncertainties. That is, when the agent is hit by a health shock (which simultaneously increases health expenses and reduces longevity), she can use the resources originally saved for consumption in the reduced period of life to pay for the increased health expenses. Since the two uncertainties partially offset each other, the precautionary saving generated in the model should be smaller than in a standard model without the correlation between health expenses and longevity. In a quantitative life-cycle model calibrated using the Medical Expenditure Panel Survey dataset, I find that the health expenses are highly correlated with the survival probabilities, and this correlation significantly reduces the demand for actuarially fair health insurance, while its impact on the demand for annuities and precautionary saving is relatively small.

Human Capital and Labor Informality in Chile: A Life-Cycle Approach

Labor informality accounts for nearly 40% of the labor force in Latin America. While a more traditional view sees this phenomenon as a consequence of barriers to mobility resulting from poorly designed labor regulations, recent work provides evidence that individuals choose informal jobs based on their comparative advantage. In this paper, I develop a dynamic life-cycle model estimated with rich Chilean longitudinal data, in which individuals jointly decide on their schooling and labor participation, to investigate the extent to which comparative advantage drives participation in informal labor markets. I find that human capital accumulation and preferences for job amenities explain up to 72% of transitions between the informal and the formal sector while labor market segmentation accounts for 28%. These barriers to mobility are decreasing in education. These results are largely driven by heterogeneous preferences and returns to skills across sectors. For example, more educated individuals assign a higher relative importance to non-wage benefits, particularly in formal jobs, while less educated individuals value more monetary rewards; high ability workers are more productive in the formal sector, while low ability workers are more productive in the informal sector; and unlike labor market experience acquired in informal activities, experience acquired in formal jobs is transferable across sectors. Finally, using the model to simulate the effects of a 20% wage subsidy in formal jobs for young workers, I find that individuals react to labor market expectations and their decisions are persistent. The subsidy would decrease the incentives to informality for both targeted groups and younger workers, while the reduction in informality rates as a consequence of the policy would remain persistent for all the life-cycle.

Free to Leave? A Welfare Analysis of Divorce Regimes

During the 1970s, the United States switched from mutual consent to a unilateral divorce regime. Who benefited/lost from this change? We develop a dynamic life cycle model in which agents make consumption, saving, work, and marital-status decisions under a given divorce regime. Calibrating the model to match key moments for the 1940 cohort and conditioning solely on gender, our ex ante welfare analysis finds that women fare better under mutual consent whereas men prefer a unilateral system. Conditioning as well on initial productivity (expected income), we find that the top three quintiles of men and the top two quintiles of women prefer unilateral divorce. (JEL D91, J12, J16, K36)

A dynamic life-cycle model for the provisioning of software testing services

Information and communications technology (ICT)-enabled international sourcing of software-intensive systems and services (eSourcing) is a powerful strategy for managing businesses more effectively. China is becoming a superpower for eSourcing service provisioning, but most Chinese providers are small- or medium-sized and leverage the mediated eSourcing model, delivering services to foreign ICT clients who interface with end-clients onshore. This model restricts the providers to low-value projects. This paper probes eSourcing of software testing services within the Chinese market because testing is one of the best ICT services small- and medium-sized providers can provide to develop domain and technological knowledge required to transcend the limitations of the mediated sourcing model. This paper draws upon a literature review and a case study to create and validate a life-cycle model for the provisioning of software testing services that helps providers to develop the capabilities for overcoming the limitations of mediated sourcing. This model helps clients and providers to dynamically manage the life-cycle, assigns specific responsibilities to the involved roles, and supports the tasks of the roles and the entire life-cycle with a class of integrated requirements, test, and defect management systems. This class is found to be the most important class of information systems for enabling the life-cycle.

Unilateral Divorce, the Decreasing Gender Gap, and Married Women's Labor Force Participation

Married women's labor force participation (LFP) increased dramatically in the United States between the 1940 and 1960 cohort. The two cohorts lived under different divorce regimes (unilateral divorce rather than mutual consent). The 1960 cohort also had a lower gender wage gap. We use a quantitative dynamic life-cycle model of endogenous marital status, calibrated to key statistics for the 1940 cohort, to study the effects of these two changes. We find that both drivers combined are able to account for over 50 percent of the increase in married women's LFP and also generate large movements in marriage and divorce rates.

Retirement Savings: A Tale of Decisions and Defaults

We examine the behavior of members of an industry-wide pension fund to assess both the prevalence of defaults and their impact on retirement savings. Our empirical investigations show that preferences, demographic characteristics and labor mobility matter greatly when it comes to the low active plan choice (or high defaulting) and overall level of pension bene ts. Using a structural dynamic life-cycle model, we then evaluate the ability of these empirically motivated factors to explain retirement savings patterns. In our model, individuals decide how much to save in a setting that combines an irreversible automatic enrolment with an active decision regime. After automatic enrolment, there is an initial choice between two pension plans (de fined benefi t vs. defi ned contribution), and then members decide (possibly by default) their voluntary contributions and type of investment allocation. We estimate the model using the simulated method of moments on administrative data from a large Australian pension fund. Our results show that default settings strongly influence wealth accumulation. Such settings are also highly persistent, both over time and across decisions. Overall, our findings suggest that if defaults (particularly the irreversible ones) are not carefully designed, retirement savings can be severely a ffected.

Welfare implications of product choice regulation during the payout phase of funded pensions

AbstractIn many countries, governmental support for funded old-age programmes comes at the cost of at least partial mandatory annuitisation of accumulated assets in retirement. We survey regulatory frameworks for the payout phase of funded pension systems in seven European countries and the US and study the influence of mandatory annuitisation on the welfare of both rational and behaviourally influenced individuals using a dynamic life-cycle model. We show that mandatory immediate full annuitisation of retirement assets will reduce rational individuals’ certainty equivalent pension wealth by up to 54%. Softening the strict immediate annuitisation requirements along the line of regulatory realities in some of the surveyed countries reduces utility losses considerably. Behaviourally restricted individuals can benefit from full annuitisation at retirement, but generally they will also prefer more flexible regulation.

An accounting exercise for the shift in life-cycle employment profiles of married women born between 1940 and 1960

Life-cycle employment profiles of married women born between 1940 and 1960 shifted upwards and became flatter. We calibrate a dynamic life-cycle model of employment decisions of married women to assess the quantitative importance of three competing explanations of the change in employment profiles: the decrease and delay in fertility, the increase in relative wages of women to men, and the decline in child-care costs. We find that the decrease and delay in fertility and the decline in child-care cost affect employment very early in life, while increases in relative wages affect employment increasingly with age. Changes in relative wages, in particular returns to experience, account for the bulk (67 percent) of changes in life-cycle employment of married women.

Health-Related Life Cycle Risks and Public Insurance

This paper proposes a dynamic life cycle model of health risks, employment, early retirement, and wealth accumulation in order to analyze the health-related risks of consumption and old age poverty. In particular, the model includes a health process, the interaction between health and employment risks, and an explicit modeling of the German public insurance schemes. I rely on a dynamic programming discrete choice framework and estimate the model using data from the German Socio-Economic Panel. I quantify the health-related life cycle risks by simulating scenarios where health shocks do or do not occur at different points in the life cycle for individuals with differing endowments. Moreover, a policy simulation investigates minimum pension benefits as an insurance against old age poverty. While such a reform raises a concern about an increase in abuse of the early retirement option, the simulations indicate that a means test mitigates the moral hazard problem substantially.

Career Progression, Economic Downturns, and Skills

This paper analyzes the career progression of skilled and unskilled workers, with a focus on how careers are affected by economic downturns and whether formal skills, acquired early on, can shield workers from the effect of recessions. Using detailed administrative data for Germany for numerous birth cohorts across different regions, we follow workers from labor market entry onwards and estimate a dynamic life-cycle model of vocational training choice, labor supply, and wage progression. Most particularly, our model allows for labor market frictions that vary by skill group and over the business cycle. We find that sources of wage growth differ: learning-by-doing is an important component for unskilled workers early on in their careers, while job mobility is important for workers who acquire skills in an apprenticeship scheme before labor market entry. Likewise, economic downturns affect skill groups through very different channels: unskilled workers lose out from a decline in productivity and human capital, whereas skilled individuals suffer mainly from a lack of mobility.

Optimal Taxation and Human Capital Policies Over the Lifecycle

This paper derives optimal income tax and human capital policies in a dynamic life cycle model of labor supply and risky human capital formation. The wage is a function of both stochastic, persistent, and exogenous "ability" and endogenous human capital. Human capital is acquired throughout life through monetary expenses and training time. The government faces asymmetric information regarding the initial ability of agents and the lifetime evolution of ability, as well as the labor supply. When human capital is observable, the optimal subsidy on human capital expenses is determined by three considerations: counterbalancing distortions to human capital investment from the taxation of wage and capital income, encouraging labor supply, and providing insurance against adverse draws from the productivity distribution. When the wage elasticity with respect to ability is increasing in human capital, the optimal subsidy involves less than full deductibility of human capital expenses on the tax base, and falls with age. The optimal tax treatment of training time also depends on its interactions with contemporaneous and future labor supply. I consider two ways to implement the optimum: income contingent loans, and a tax scheme that allows for a deferred deductibility of human capital expenses. I also study the case in which human capital is unobservable, and derive how income taxes need to be adjusted to indirectly incentivize human capital acquisition. Numerical results are presented that suggest that full deductibility of expenses might be close to optimal, and that simple linear age-dependent policies can achieve most of the welfare gain from the second best.