Life-cycle Labor Supply Research Articles

The welfare costs of misinformation

Social Security (SS) benefits, with an average replacement rate of around 40 percent, serve as an important source of retirement income for older Americans. Yet, the size of lifetime benefits a household receives depends on many factors, including the age of benefit claim and life-cycle labor supply decisions. Given the complexity of the associated rules, many households may lack understanding of one or more aspects of the system. In this work, we use a life-cycle model of consumption, savings, labor supply, and Social Security application decisions to study the welfare impact of such misinformation. Our findings indicate significant welfare losses stemming from misinformation, especially when it causes individuals to strongly over-estimate the value of future entitlements. Additionally, we show that the Social Security Statement program, a large public information campaign, must inform only 20.1 percent of misinformed individuals in order for aggregate benefits of information to outweigh aggregate costs.

Physiological aging and life-cycle labor supply across countries.

We construct a cohort-based frailty index for 180 countries over the period 1990-2019. We use this measure of physiological aging to estimate the impact of deteriorating health on labor force participation. Our three-dimensional panel framework, in which the unit of observation is a cohort in a given country at a given age, allows us to control for a range of unobserved factors. Our identification strategy further exploits a compensating law of physiological aging to account for reverse causality. We find a negative effect of physiological aging on labor market participation: an increase of the frailty index by one percent leads to a reduction of labor force participation of about 0.6 (±0.2) percentage points. Since health deficits (in the frailty index) are accumulated at a rate of about 3 percent per year of life, almost all of the age-related decline in labor force participation can be motivated by deteriorating health.

Effects of Aging on Labor-Intensive Crop Production from the Perspectives of Landform and Life Cycle Labor Supply: Evidence from Chinese Apple Growers

The aging of the agricultural labor force is an irreversible trend that has become an important issue in China’s economic transformation. Previous studies on the effects of an aging population in developing countries on agriculture mainly focused on food crops, and the conclusions were mixed. Using data for apple growers in Shaanxi Province, China, we used ordinary least squares (OLS), stochastic frontier production function (SFA), and truncated regression to investigate how rural aging affects apple production under different landform conditions. We provided evidence that (i) aging leads apple growers to use hired labor to replace family labor in the flatlands, but not in mountainous and hilly areas, due to landform constraints on the factor substitution; (ii) aging has no significant impact on mechanical inputs in either the plains or the mountains, indicating that machinery cannot effectively replace the labor force; (iii) limited by a shortage of labor quantity and quality, apple growers respond to aging by reducing agricultural inputs in mountainous and hilly areas; (iv) changes in input structure cause aging to have little influence on yield and technical efficiency in flatlands, while aging significantly reduces yield in mountainous and hilly areas; (v) there is a nonlinear relationship between aging and technical efficiency and yield; and (vi) because the overall mechanization level of China’s apple industry is low, mechanical substitution for labor is not common in apple production.

Bounded rationality and optimal retirement age

This paper explores a lifecycle model of labor supply and endogenous retirement behavior for households whose planning window is truncated and who will reoptimize as extra information on productivity is revealed over time. This short horizon model internalizes the restriction on temporal resource allocation, and the labor supply is closely dependent on the degree of productivity changes in view. With the model, the retirement timing—the moment at which the marginal value from the expected resources drops below a threshold—evolves according to the planning window. Using a discrete time overlapping generations framework with leisure substitutability, in which the constraint on time is explicitly added, I demonstrate that the calibrated model economy reasonably replicates the salient facts regarding lifecycle labor supply and retirement behaviors without a borrowing constraint commonly found in models of leisure-consumption substitutability. Furthermore, this result is robust to sensitivity check. With the extended environment of mortality risks and bequests, this paper explicitly quantifies the relationship among retirement age, planning horizon, equilibrium bequests and other lifecycle characteristics from the calibrated general equilibrium.

The Great Depression and the rise of female employment: A new hypothesis

The life-cycle labor supply of women born at the turn of the 20th century diverged sharply from previous cohorts. Although they had similar participation rates in early adulthood, younger cohorts were significantly more likely to work at middle age. This paper documents a link between these changing patterns of female labor supply and the Great Depression. We find that the onset of the Great Depression led to an increase in young women's employment in 1930 via an added-worker effect. Cohorts induced into the workforce in the early 1930s had significantly higher employment rates through the 1940s and 1950s of up to 3 percentage points, suggesting a permanent impact of the Great Depression on women's lifecycle labor supply.

Effects of taxes and safety net pensions on life-cycle labor supply, savings and human capital: The case of Australia

We structurally estimate a life-cycle model of consumption, labor supply and retirement, using data from the Australian HILDA panel. We use the model to evaluate effects of Australia’s Age Pension system and income tax policy on labor supply, consumption and retirement. Our model accounts for human capital, savings, uninsurable wage risk and credit constraints. We account for “bunching” of hours by assuming a discrete set of hours levels, and we investigate labor supply on both the 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 Australia’s Age Pension system as currently designed is poorly targeted. Our simulations suggest that a doubling of taper rates, combined with a 5.9% reduction of income tax rates, would be budget neutral and Pareto improving.

Optimal life-cycle labour supply, consumption, and investment: The role of longevity-linked assets

Abstract We solve in closed form the problem of an agent who maximises his inter-temporal lifetime utility. The agent is subject to the so-called longevity risk, i.e. his force of mortality is stochastic. His utility is additively separable on leisure (while working) and consumption. Consumer’s preferences belong to the Hyperbolic Absolute Risk Aversion family, with a subsistence consumption level. The individual optimally chooses labour supply, consumption, and portfolio allocation. We study these optimal choices when the agent has access to a complete financial market, where he can trade in longevity-linked securities. He can also contribute to a personal pension scheme. A calibrated application shows that the optimal demand for the longevity-linked assets crucially depends on the stages of the agent’s life and his wage profiles. This observation opens up the possibility of longevity risk transfers across individuals with heterogeneous characteristics.

Great Depression and the Rise of Female Employment: A New Hypothesis

The cohorts of women born at the turn of the 20th century increased markedly their participation in the labor market when older. These are the first cohorts who worked after their childbearing years. In this paper, we document a link between their work behavior and the Great Depression. We show that the 1929 Crash attracted young women 15 to 34 years old in 1930 (whom we name D-cohort) into the labor market, possibly via an added-worker effect. Using several years of Census micro data, we further document that the same cohort remained or re-entered the labor market in the 1940s and 1950s and that its entire life cycle labor supply is tightly linked to the conditions dating back to the Great Depression. We argue that these facts are consistent with the hypothesis of a labor supply shift for this cohort triggered by the 1929 Crash.

Time to Care? The Effects of Retirement on Informal Care Provision

This paper analyzes the impact of a reduction in women's labor supply through retirement on their informal care provision. Using SOEP data from the years 2001- 2016 the analysis addresses fundamental endogeneity problems by applying a fuzzy regression discontinuity design. We exploit early retirement thresholds for women in the German pension system as instruments for their retirement decision. We find significant positive effects on informal care provided by women retiring from employment at the intensive and extensive margin that are robust to various sensitivity checks. Women retiring from full-time employment, highly educated women and women providing care within the household react slightly stronger. Findings are consistent with previous evidence and underlying behavioral mechanisms. They point to a time-conflict between labor supply and informal care before retirement. Policy implications are far-reaching in light of population aging. Prevalent pension reforms that aim to increase life-cycle labor supply threaten to reduce informal care provision by women and to aggravate the existing excess demand for informal care.

Effects of Taxes and Safety Net Pensions on Life-Cycle Labor Supply, Savings and Human Capital: The Case of Australia

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.

A structural explanation of recent changes in life-cycle labor supply and fertility behavior of married women in the United States

This study documents and explains important changes in the life-cycle labor supply and fertility behavior of married women in the United States from the 1950s to more recent cohorts. The younger cohorts, relative to the 1950s, supply more labor at earlier stages of the life-cycle, delay motherhood to later stages without reducing the fertility rate, and upon childbearing, show a greater tendency to stay out of the labor force. In a life-cycle model for married couples in which a household makes decisions on fertility as well as labor supply, consumption, and savings, all the behavioral changes are jointly and quantitatively explained by a combination of changes in various labor supply/fertility determinants, with the increased returns (penalties) to work (non-work) experience being the dominant contributor. The results survive a series of robustness tests, including endogenizing education choice and assortative marriage.

Addressing Longevity’ Heterogeneity in Pension Scheme Design

This paper demonstrates that the link between heterogeneity in longevity and lifetime income across countries is mostly high and often increasing; that it translates into an implicit tax/subsidy, with rates reaching 20 percent and higher in some countries; that such rates risk perverting redistributive objectives of pension schemes and distorting individual lifecycle labor supply and savings decisions; and that this in turn risks invalidating current reform approaches of a closer contribution-benefit link and life expectancy-indexed retirement age. The paper suggests and explores a number of interventions in the accumulation, benefit determination, and disbursement stages to address longevity’ heterogeneity.

Life-Cycle Labour Supply and Social Security Wealth: Evidence from the 1995 Italian Pension Reform

Life-Cycle Labour Supply and Social Security Wealth: Evidence from the 1995 Italian Pension Reform

Labour Supply: The Roles of Human Capital and The Extensive Margin

Abstract We specify and estimate a life-cycle labour supply model that expands on earlier work by simultaneously including human capital accumulation, saving and bequests, an active extensive margin, a realistic specification of the progressive tax structure and the Social Security system, and an accounting for private pensions and health expenditures. By incorporating all these features, we develop new insights into how taxes affect life-cycle labour supply. For instance, we find that labour supply elasticities vary in important ways with age, education and the tax structure itself. We also show how human capital affects elasticities differently on the intensive versus extensive margins.

Life‐cycle Labour Supply with Human Capital: Econometric and Behavioural Implications

I examine econometric and behavioural implications of including human capital in the life-cycle labour supply model. With human capital, the wage is no longer the price of time - which is, instead, the wage plus returns to work experience. This has important implications: first, labour supply elasticities become functions of both preference and wage process parameters. One cannot estimate them separately. Second, the data appear consistent with larger elasticities than prior work suggests. Third, contrary to conventional wisdom, permanent tax changes can have larger effects on current labour supply than temporary changes. Fourth, effects of permanent tax changes grow over time

Real wage and labor supply in a quasi life-cycle framework: a macro compression by Swedish National Transfer Accounts (1985-2003)

This paper examines the life-cycle dynamics of real wages and labor supply in Sweden. The descriptive results lend support to the inter-temporal substitution hypothesis (ISH), as the age patterns of real wages and the labor supply are both hump-shaped. However, the age-wage profiles increasingly shift toward older ages over time, whereas the age-employment profiles do not. This leads to an accentuated difference-in-differences of the two variables from prime working age through retirement, which casts doubt on the explanatory power of the ISH for the lifecycle labor supply. Econometric analysis shows that the intra-temporal elasticity outweighs the inter-temporal elasticity of substitution, and thus provides little support for the ISH. The estimated labor supply elasticity also varies considerably across age groups. This suggests that an array of age-specific parameters are needed in calibrating the overlapping generation model (OLG).

Effects of Substitutability Between Mother's Child Care and Market Care Service on Life-Cycle Labor Supply and Fertility Behavior

Effects of Substitutability Between Mother's Child Care and Market Care Service on Life-Cycle Labor Supply and Fertility Behavior

Revisiting the Role of Home Production in Life-Cycle Labor Supply

This paper revisits the argument, posed by Rupert, Rogerson, and Wright (2000), that estimates of the intertemporal elasticity of labor supply that do not account for home production are biased downwards. I use the American Time Use Survey, a richer and more comprehensive data source than those used previously, to replicate their analysis and explore how other factors interact with household and market work hours to affect the labor supply elasticity. In a straightforward replication of their research, I find an elasticity of about 0.4, somewhat larger than previously estimated. In a richer cohort analysis that accounts for demographics, household characteristics, and the endogeneity of wages, however, I obtain an elasticity estimate that is essentially zero.

Uniform Asymptotic Risk of Averaging GMM Estimator Robust to Misspecification, Second Version

This paper studies the averaging generalized method of moments (GMM) estimator that combines a conservative GMM estimator based on valid moment conditions and an aggressive GMM estimator based on both valid and possibly misspecified moment conditions, where the weight is the sample analog of an infeasible optimal weight. It is an alternative to pre-test estimators that switch between the conservative and aggressive estimators based on model specification tests. This averaging estimator is robust in the sense that it uniformly dominates the conservative estimator by reducing the risk under any degree of misspecification, whereas the pre-test estimators reduce the risk in parts of the parameter space and increase it in other parts. To establish uniform dominance of one estimator over another, we establish asymptotic theories on uniform approximations of the finite-sample risk differences between two estimators. These asymptotic results are developed along drifting sequences of data generating processes (DGPs) that model various degrees of local misspecification as well as global misspecification. Extending seminal results on the James-Stein estimator, the uniform dominance is established in non-Gaussian semiparametric nonlinear models. The proposed averaging estimator is applied to estimate the human capital production function in a life-cycle labor supply model.

Revisiting the Role of Home Production in Life-Cycle Labor Supply

This paper revisits the argument, posed by Rupert, Rogerson, and Wright (2000), that estimates of the intertemporal elasticity of labor supply that do not account for home production are biased downward. The author uses the American Time Use Survey, a richer and more comprehensive data source than those used previously, to replicate their analysis, but he also explores how other factors interact with household and market work hours to affect the elasticity of labor supply. An exact replication of their analysis yields an elasticity of about 0.4, somewhat larger than previously estimated. Once the author accounts for demographics and household characteristics, particularly the number of children in the household, the estimate is essentially zero. This is true even when accommodating extensive-margin labor adjustments. Households' biological inability to smooth childbearing over the life cycle and the resulting income effect on market work hours drive this result.