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Understanding Earnings, Labor Supply, and Retirement Decisions 
WP 2017-367
Xiaodong Fan, Ananth Seshadri, and Christopher Taber 

  • This paper develops and estimates a rich life-cycle model that merges a Ben-Porath style human capital framework with a neoclassical style framework with endogenous labor supply and retirement framework. Each individual makes decisions on consumption, human capital investment, labor supply and retirement. Investment in human capital generates wage growth over the life-cycle, while depreciation of human capital is the main force generating retirement.
  • We use the estimated model to simulate the impacts of various policy changes:
    • We show that less generous Social Security benefits result in higher labor supply later in the life-cycle, so workers adjust their investment over the life-cycle. This results in a higher human capital level as well as higher labor supply earlier in the life-cycle.
    • Modeling labor supply and human capital decisions jointly is critical in an analysis of the effects of policy changes.
    • While presumably other factors would be important for explaining other features of labor markets, endogenous labor supply is critical for understanding life-cycle human capital investment and life-cycle human capital investment is critical for understanding life-cycle labor supply.
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