Retirement incentives, individual heterogeneity and labor transitions of employed and unemployed workers

an article by J. Ignacio García-Pérez and Alfonso R. Sánchez-Martín (Universidad Pablo de Olavide, Spain) and Sergi Jiménez-Martín (Universitat Pompeu Fabra, Barcelona GSE, Spain and FEDEA, Spain) published in Labour Economics Volume 20 (January 2013)

Abstract

In this paper, we analyse the sensitivity of the labour market decisions of workers close to retirement with respect to the incentives created by public regulations. We improve upon the extensive prior literature on the effect of pension incentives on retirement by jointly modelling the transitions between employment, unemployment and retirement, paying special attention to the transition from unemployment to retirement (which is particularly important in Spain and other European countries, and whose relevance is increasing as a result of the recent economic crisis).

Using administrative data, we find that, when properly defined, economic incentives have a strong impact on labour market decisions.

Unemployment regulations are shown to be particularly influential for retirement behaviour, along with the more traditional determinants linked to the pension system. Pension variables also have a major bearing on workers’ re-employment decisions. The quantitative impact of the incentives, however, is greatly affected by the existence of unobserved heterogeneity among workers. Its omission leads to sizeable biases in the assessment of the sensitivity to economic incentives.

We confirm the importance of this potential problem in the case of the change in early retirement provisions legislated in Spain in 2002 (which we analyse with a difference-in-difference approach).

JEL classification H55, J14, J26, J64

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