Lifetime Labor Supply Research Articles

Life Expectancy, Annuity Markets and Economic Behaviors

In the past century, life expectancy in most countries has increased. At the same time, there is an increasing demand for the development of annuity markets. In this paper, we construct a three-period life-cycle model with credit constraints and annuity markets, and investigate the effects of increasing life expectancy and the development of annuity markets on individuals’optimal choices of the length of schooling, saving behavior, retirement length and expected lifetime total labor supply. Within this framework, we find that as life expectancy increases, individuals choose to gain more education and increase savings, but how they are going to change the retirement decision and expected lifetime labor supply depends on the maturity of annuity markets and the interest rate in the economy. If there is no mature annuity market, or if the interest rate is low, as life expectancy increases, individuals will retire earlier. However, since the survival rate also increases, expected lifetime labor supply may not decline even when labor supply at the two end stages of life does. We also find that if life expectancy remains unchanged, as annuity markets develop, individuals will retire earlier. The robustness of the results has been checked with numerical examples. Our work is part of an important literature that tries to explain the Ben-Porath puzzle”raised by Hazan（2009）, who shows that a necessary condition for the Ben-Porath mechanism（Ben-Porath, 1967）to hold is that increased life expectancy must also increase expected lifetime labor supply, which is not supported by empirical evidence. The main contributions of our paper are as follows: First, we introduce the annuity market, which is closely linked with life expectancy and retirement, to the model when revisiting the Ben-Porath mechanism. We emphasize the importance of annuity markets when analyzing the effects of increasing life expectancy on individuals’behaviors, and also show that the development of annuity markets will have an effect on individuals’optimal choice. Second, we not only analyze the effects of increasing life expectancy and the development of annuity markets on individuals’retirement decision, but also focus on the effects on individuals’expected lifetime labor supply, which is affected by both mortality rates and labor supply in each period. This makes our results comparable to the empirical findings by Hazan（2009）.

Impact of mortality reductions on years of schooling and expected lifetime labor supply

Hazan (2009) performs empirical analysis based on the conjecture that a necessary condition for mortality decline to cause longer years of schooling is that it also increases expected lifetime labor supply, and reaches controversial conclusions. We aim to examine the theoretical validity of Hazan’s (2009) conjecture, and more generally, to understand the relation between these two conditions in a standard life-cycle model. We find that the relation between the effects on optimal years of schooling and expected lifetime labor supply differs systematically with respect to mortality reductions at different stages of the life cycle. Based on these systematic differences, we find that longer lifetime labor supply is not sufficient for increased years of schooling for all mortality reductions occurring during the schooling phase, and not necessary for increased years of schooling for some mortality reductions during the working phase.

Education, lifetime labor supply, and longevity improvements

This paper presents an analysis of the differential role of mortality for the optimal schooling and retirement age when the accumulation of human capital follows the so-called “Ben–Porath mechanism”. We set up a life-cycle model of consumption and labor supply at the extensive margin that allows for endogenous human capital formation. This paper makes two important contributions. First, we provide the conditions under which a decrease in mortality leads to a longer education period and an earlier retirement age. Second, those conditions are decomposed into a Ben–Porath mechanism and a lifetime-human wealth effect vs. the years-to-consume effect. Finally, using US and Swedish data for cohorts born between 1890 and 2000, we show that our model can match the empirical evidence.

Labor and consumption across the lifecycle

We propose new measures to summarize and compare age profiles of consumption and labor income. One measure is the lifetime support ratio or the ratio of effective lifetime labor to effective lifetime consumption. Two other measures measure the timing of work and consumption over the lifecycle. Using a highly stylized model we show how changes in these features of the lifecycle influence the standard of living that can be achieved. To illustrate the value of these measures we consider two practical applications. In the first we analyze the effect of increasing life expectancy on lifetime effective labor and consumption. We show that in longer life is leading to greater lifetime consumption but little response in lifetime labor supply. The exception to this generalization is in low income, high mortality countries where the gains in life expectancy are occurring at the working ages as well as the non-working ages. In the second application we consider whether the lifetime support ratio and the timing of consumption relative to labor income are influenced most by variation in life cycle patterns of work or lifecycle patterns of consumption. The answer depends on the level of development. In upper-middle income countries and high-income countries both are important. In these countries, then, effective policy should address both sides of the lifecycle – producing and consuming. In lower-income countries, however, only the age patterns of labor income appear to matter. Policies related to labor markets and labor force behavior appear to be critical under these circumstances.

Life Expectancy, Schooling, and Lifetime Labor Supply: Theory and Evidence Revisited

This paper presents a theoretical and empirical analysis of the role of life expectancy for optimal schooling and lifetime labor supply. The results of a simple prototype Ben-Porath model with age-specific survival rates show that an increase in lifetime labor supply is not a necessary, nor a sufficient, condition for greater life expectancy to increase optimal schooling. The observed increase in survival rates during working ages that follows from the ``rectangularization'' of the survival function is crucial for schooling and labor supply. The empirical results suggest that the relative benefits of schooling have been increasing across cohorts of US man born 1840-1930. A simple quantitative analysis shows that a realistic shift in the survival function can lead to an increase in schooling and a reduction in lifetime labor hours.

Life Expectancy, Schooling, and Lifetime Labor Supply: Theory and Evidence Revisited

This paper presents a theoretical and empirical analysis of the role of life expectancy for optimal schooling and lifetime labor supply. The results of a simple prototype Ben-Porath model with age-specific survival rates show that an increase in lifetime labor supply is not a necessary, or a sufficient, condition for greater life expectancy to increase optimal schooling. The observed increase in survival rates during working ages that follows from the rectangularization of the survival function is crucial for schooling and labor supply. The empirical results suggest that the relative benefits of schooling have been increasing across cohorts of U.S. men born between 1840 and 1930. A simple quantitative analysis shows that a realistic shift in the survival function can lead to an increase in schooling and a reduction in lifetime labor hours. [PUBLICATION ABSTRACT]

The link between pensions and retirement timing: Lessons from California teachers

I exploit a major, unanticipated reform of the California teachers' pension to provide quasi-experimental evidence on the link between pension features and retirement timing. Using two large administrative data sets, I conduct a reduced-form analysis that leverages the nonlinearities in the return to work generated by the pension features and the reform-induced shifts of these nonlinearities for identification. The implied estimates of the elasticity of lifetime labor supply with respect to the return to work are centered around 0.04 in the medium-run and are less than 0.1 in the long-run.

Lifetime Labor Supply and Human Capital Investment

We develop a model of retirement and human capital investment to study the effects of tax and retirement policies. Workers choose the supply of raw labor (career length) and also the human capital embodied in their labor. Our model explains a significant fraction of the US-Europe difference in schooling and retirement. The model predicts that reforms of the European retirement policies modeled after the US can deliver 15-35 percent gains in per-worker output in the long run. Increased human capital investment in and out of school accounts for most of the gains, with relatively small changes in career length. JEL classification: E24; J24

Life Expectancy and Income: The Ben-Porath Mechanism Revisited

In this paper we show that it may be optimal for individuals to educate more and decrease future labor supply (choose earlier retirement) when life expectancy increases. This result reconciles the findings of Hazan [Hazan, M., 2009. Longevity and Lifetime Labor Supply: Evidence and Implications. Econometrica 77, 1829-1863] with theory. Further, the paper contributes to a better understanding of the conflicting empirical findings on the causal effect on income per capita from increased life expectancy.

Women’s lifetime labor supply and labor market experience

The pattern of joining the labor force only at an advanced stage of the life-cycle was widespread among American women in the 1960s and 1970s, but not since the 1980s. To explain this change we conduct a theoretical analysis of the interrelation between women’s lifetime labor supply choices and the dynamic macroeconomic environment. In our model women choose the late-entry pattern only at early stages of the growth process when wages are sufficiently low and grow sufficiently rapidly. As the economy grows, this lifetime labor profile vanishes and women either join the labor force either early in life or not at all.

Longevity and Lifetime Labor Supply: Evidence and Implications

Conventional wisdom suggests that increased life expectancy had a key role in causing a rise in investment in human capital. I incorporate the retirement decision into a version of Ben-Porath's (1967) model and find that a necessary condition for this causal relationship to hold is that increased life expectancy will also increase lifetime labor supply. I then show that this condition does not hold for American men born between 1840 and 1970 and for the American population born between 1890 and 1970. The data suggest similar patterns in Western Europe. I end by discussing the implications of my findings for the debate on the fundamental causes of long-run growth.

To work or to work out: a moral-hazard interpretation of labor supply, retirement, and investments in longevity

AbstractIn a moral-hazard model with multiple tasks, an agent engages in different activities, labelled work, delayed retirement, and work out (investments in longevity). The latter imposes higher effort costs on weekly labor supply, but increases possibilities for life time labor supply. Work out does not affect aggregate output and does therefore not accrue to the benefit of the principal. Second-best incentives for work out areU-shaped in the agent's ability, and so is the effort level supplied by the agent. These theoretical findings are supported by recent empirical evidence on longevity, which is not always monotonically increasing in ability.

Uncertain Longevity and Investment in Education

It has been argued that increased life expectancy raises the rate of return on education, causing a rise in the investment in education followed by an increase in lifetime labor supply. Empirical evidence of these relations is rather weak. Building on a lifecycle model with uncertain longevity, this paper shows that increased life expectancy does not suffice to warrant the above hypotheses. We provide assumptions about the change in survival probabilities, specifically about the age dependence of hazard rates, which determine individuals' behavioral response w.r.t. education, work and age of retirement. Comparison is made between the case when individuals have access to a competitive annuity market and the case of no insurance.

Longevity and Lifetime Labor Supply: Evidence and Implications

Conventional wisdom suggests that increased life expectancy had a key role in causing a rise in investment in human capital. I incorporate the retirement decision into a version of Ben-Porath's (1967) model and find that a necessary condition for this causal relationship to hold is that increased life expectancy will also increase lifetime labor supply. I then show that this condition does not hold for American men born between 1840 and 1970 and for the American population born between 1890 and 1970. The data suggest similar patterns in Western Europe. I end by discussing the implications of my findings for the debate on the fundamental causes of long-run growth.

Lifetime aggregate labor supply with endogenous workweek length

This paper studies lifetime aggregate labor supply with endogenous workweek length. Such a theory is needed to evaluate various government policies. A key feature of our model is a nonlinear mapping from hours worked to labor services. This gives rise to an endogenous workweek that can differ across occupations. The theory determines what fraction of the lifetime an individual works, not when. We find that constraints on workweek length have different consequences for total hours than for total labor services. Also, we find that policies designed to increase the length of the working life may not increase aggregate lifetime labor supply.

Lifetime Labor Supply in a Search Model of Unemployment

textabstractThis paper investigates the age-dependency of participation and unemployment by integrating job search with intertemporal optimizing behavior of finitely-lived households. We find that search frictions and tax rates distort the decisions of older workers to a much larger extent than that of young workers. This finding provides an explanation of the observed fall of participation rates of elder workers as a result of the post-war increase in tax rates and replacement rates. We show that the age pattern of search unemployment does not match observed unemployment and we propose a new concept of ‘voluntary’ unemployment that agrees well with observations.

Labor Market Experience and the Gender Gap

The pattern of joining the labor force only at an advanced stage of the life-cycle was widespread among American women in the 1960s and 1970s, but not since the 1980s. To explain this change we conduct a theoretical analysis of the interrelation between women's lifetime labor supply choices and the dynamic macroeconomic environment. In our model women choose the late-entry pattern only at early stages of the growth process when wages are sufficiently low and grow sufficiently rapidly. As the economy grows, this lifetime labor profile vanishes and women either join the labor force either early in life or not at all.

Synchronization of Work Schedules

Why do people work intermittently and why do they synchronize their work schedules? A group of interacting workers who differ in tastes is analyzed. A lifetime labor supply model is developed which combines tiring, rhythmic changes in the environment, and interactions among workers arising from communication and coordination. A multiplicity of synchronized equilibria arises. These equilibria can be ranked according to the length of the work period. Equilibria with longer hours are preferred by all workers in the group. The worker with the highest aversion to work sets the standard and others conform to him. Copyright 1996 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Social Security, Earnings Tests, and Age at Retirement

The effect of a Social Security system on the decision to retire is a matter of considerable controversy. Among the aspects of such systems causing debate have been the existence and effects of imperfect capital markets, the purported incentives embodied in "earnings tests, "the degree of actuarial fairness in such systems, and the degree to which incentives increase or decrease at certain critical ages (62 and 65 in the United States). The present article contains an analysis of the retirement decision that illuminates many of these issues and provides new insights into the effects of Social Security on retirement. Using a straightforward labor-leisure model and associated analytical diagrams, the article shows the labor-supply effect of actuarial unfairness in the benefit formula, the impact of an earnings test in causing workers to postpone retire ment (thus increasing lifetime labor supply), and the impact of imperfect capital markets on the timing of retirement.

Income tax policy and lifetime labor supply

A progressive income tax structure provides incentives for individuals to alter their rate of work and their age of retirement. Compared to a zero tax or proportional tax equilibrium, progressive taxation induces individuals to take less leisure in the form of retirement in exchange for more leisure during the worklife, especially at high wage levels. The imposition of a special pension tax provision on top of a progressive tax structure offsets the distortion on leisure alternatives imposed by progressivity. Indeed, the pension tax deferral provision can neutralize the impact of tax progressivity on the work profile over life. The magnitude of these tax inducements in the U.S. tax structure are non-trivial and therefore are expected to alter labor supply decisions over the lifetime. The model finds empirical support using data from the Social Security Newly Entitled Beneficiaries Survey.