Dissertations, Theses, and Capstone Projects

Date of Degree

9-2015

Document Type

Dissertation

Degree Name

Ph.D.

Program

Economics

Advisor

David A. Jaeger

Keywords

Aging; Labor Supply; Longevity; Retirement; Survival Probability; Un-retirement

Abstract

The increase in life expectancy in the US and the changing labor supply of older workers have raised issues about the fiscal solvency of health care and pension systems, as well as labor market stability and employment opportunities for younger workers. In light of these facts, this dissertation consists of three essays that focus on the economic causes and consequences of changes in the labor supply of older workers due to population aging.

The first essay examines the effect of longevity on older Americans' labor supply decisions of retirement and un-retirement. Instead of using self-rated survival probabilities as the proxy of longevity expectations, I use data from the Health and Retirement Study to predict longevity from a Gompertz survival model with a rich set of variables including parental mortality information, current health and socio-economic variables. I find that the predicted longevity fits actual longevity better than subjective survival rates. Using predicted longevity as one of the independent variables in a sequential logit model of retiring and un-retiring, I find that individuals retire and re-enter the labor market as if they knew their true potential longevity, i.e., individuals with higher predicted objective longevity retire later, and are more likely to return to the labor market after initial retirement. I further investigate the consequences of extreme mismatch between subjective survival rates and objective longevity implied by the model's prediction, and I find that the misperception leads to retirees' sub-optimal saving behaviors.

The second essay makes an effort to explore the theoretical foundation for the mechanism through which the risk of mortality affects individuals' decisions about work. I construct a life-cycle model of labor supply with health investment and heterogeneous risk of mortality. The heterogeneity in mortality risk is modeled as a frailty parameter which shifts the mortality hazard proportionally. Individuals can invest in health in order to recover from an adverse health shock and revert the high propensity of death which they were born with. I estimate and calibrate the model using data from Health and Retirement Survey. I simulate the life cycle path of labor supply for two groups of representative individuals under the same condition except for different survival curves, one in year 2000 and one projected in 2100 where life expectancy is predicted to be increased by 9 years. I find that in a more favorable survival environment, individuals would choose to work more and spend more on health.

The third essay examines a natural follow-up question about the consequence of a larger labor supply of older workers: does the higher labor force participation rate of the elderly crowd out employment opportunities of younger workers? I utilize the Social Security 'Notch', a reduction in Social Security benefits for cohorts born after 1916 due to the 1977 Amendments, as an exogenous policy change to identify the effect on younger workers' employment. Using data from Current Population Survey from 1972 to 1981, I do not find any significant crowding-out effect of the notch generation on younger workers age 25-39. I further investigate the variations in different occupational categories and find that changes in employment rates of younger workers vary across occupations. Last, I do not find significant suppressing effect of increasing labor supply of older workers on younger workers' wage income.

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