intertemporal labor supply and human capital accumulation we solve and estimate a dynamic model that allows agents to optimally choose their labor hours and consumption and that allows for both human capital accumulation and savings estimation results and simulation exercises indicate that the intertemporal elasticity of substitution is much higher than the conventional estimates and the downward bias comes from the omission of the human capital accumulation effect the human capital accumulation effect renders the life cycle path of the shadow wage relatively flat even though wages increase with age hence a rather flat life cycle labor supply path can be reconciled with a high intertemporal elasticity of substitution

2018 klein lecture individual and aggregate labor supply in heterogeneous agent economies with intensive and extensive margins we study business cycle fluctuations in heterogeneous agent general equilibrium models featuring intensive and extensive margins of labor supply a nonlinear mapping from time devoted to work to labor services generates operative extensive and intensive margins our model captures the salient features of the empirical distribution of hours worked including how individuals transit within this distribution we study how various specifications influence labor supply responses to aggregate technology shocks and find that abstracting from intensive margin adjustment can have large effects on the volatility of aggregate hours even if fluctuations along the intensive margin are small

revisiting wage earnings and hours profiles abstract for the youngest cohorts whose entire working life can be observed hours start falling much earlier than wages wages do not fall if they fall at all until one s late 60s the data suggest that many workers start a smooth transition into retirement by working progressively fewer hours while still facing an upward sloping wage profile this pattern is not an artifact of staggered abrupt retirement or selection this evidence imposes restrictions on dynamic models of the aggregate economy and provide updated numerical profiles that can be readily used in quantitative macroeconomic analysis to incorporate this new pattern into aggregate models

micro and macro elasticities in a life cycle model with taxes we build a life cycle model of labor supply that incorporates changes along both the intensive and extensive margin and use it to assess the consequences of changes in tax and transfer policies on equilibrium hours of work we find that changes in taxes have large aggregate effects on hours of work moreover we find that there is no inconsistency between this result and the empirical finding of small labor elasticities for prime age workers in our model micro and macro elasticities are effectively unrelated our model is also consistent with other cross country patterns

bounds on elasticities with optimization frictions a synthesis of micro and macro evidence on labor supply how can price elasticities be identified when agents face optimization frictions such as adjustment costs or inattention i derive bounds on structural price elasticities that are a function of the observed effect of a price change on demand the size of the price change and the degree of frictions the degree of frictions is measured by the utility losses agents tolerate to deviate from the frictionless optimum the bounds imply that frictions affect intensive margin elasticities much more than extensive margin elasticities i apply these bounds to the literature on labor supply the utility costs of ignoring the tax changes used to identify intensive margin labor supply elasticities are typically less than 1 of earnings as a result small frictions can explain the differences between micro and macro elasticities extensive and intensive margin elasticities and other disparate findings pooling estimates from existing studies i estimate a hicksian labor supply elasticity of 0 33 on the intensive margin and 0 25 on the extensive margin after accounting for frictions

an empirical model of labor supply in a life cycle setting this paper formulates and estimates a structural intertemporal model of labor supply using theoretical characterizations derived from an economic model of lifetime behavior a two step empirical analysis yields estimates of intertemporal and uncompensated substitution effects which provide the information needed to predict the response of hours of work to life cycle wage growth and shifts in the lifetime wage path

sources of lifetime inequality is lifetime inequality mainly due to differences across people established early in life or to differences in luck experienced over the working lifetime we answer this question within a model that features idiosyncratic shocks to human capital estimated directly from data as well as heterogeneity in ability to learn initial human capital and initial wealth we find that as of age 23 differences in initial conditions account for more of the variation in lifetime earnings lifetime wealth and lifetime utility than do differences in shocks received over the working lifetime jel d31 d91 j24 j31 to what degree is lifetime inequality due to differences across people established early in life as opposed to differences in luck experienced over the working lifetime among the individual differences established early in life which ones are the most important a convincing answer to these questions is of fundamental importance first and most simply an answer serves to contrast the potential importance of the myriad policies directed at modifying or at providing insurance for initial conditions e g public education against those directed at shocks over the working lifetime e g unemployment insurance second a discussion of lifetime inequality cannot go too far before discussing which specific type of initial condition is the most critical for determining how one fares in life third a useful framework for answering these questions should also be central in the analysis of a wide range of policies considered in macroeconomics public finance and labor economics we view lifetime inequality through the lens of a risky human capital model agents differ in terms of three initial conditions initial human capital learning ability and financial wealth initial human capital can be viewed as controlling the intercept of an agent s mean earnings profile whereas learning ability acts to rotate

the estimation of a joint wage hours labor supply model in this paper the standard cross sectional static model of labor supply is modified to make the wage endogenous and a joint wage hours model is estimated the econometric technique addresses the non linearity of the budget constraint by approximating the constraint by a series of discrete points the results show that the budget constraint is indeed nonlinear that hours affect the wage quadratically that true wage elasticities are lower as a result and that the model fits the hours distribution much better than the standard tobit model

tests of international capm with time varying covariances we perform maximum likelihood estimation of a model of international asset pricing based on capm we test the restrictions imposed by capm against a more general asset pricing model the betas in our capm vary over time as the supplies of assets change and as the conditional covariances or returns on those assets change we let the covariances change over time as a function of macroeconomic data and an alternative model allows the covariances to follow a multivariate arch process we also can identify a modified capm model with measurement error we find that the estimated capm performs much better when variances are not constant over time nonetheless capm is rejected in favour of the lessrestricted model of asset pricing

retirement home production and labor supply elasticities a standard life cycle model with home production implies a tight relationship between key preference parameters and the changes in time allocated to home production and leisure at retirement we derive this relationship and use data from the atus to explore its quantitative implications the key finding is that the intertemporal elasticity of substitution for leisure and the elasticity of substitution between time and goods in home production are approximately equal in contrast to what is commonly assumed

portfolio crowding out empirically estimated this paper tests hypotheses regarding the parameters in investors asset demand functions the hypothesis that federal bonds are closer substitutes for equity than for money implies portfolio crowding out by federal borrowing regression studies of asset demand functions have needed to impose prior beliefs to obtain precise and plausible estimates for the parameters this paper uses a mle technique that dominates regression in that it makes full use of the constraint that the parameters are not determined arbitrarily but rather are determined by mean variance optimization on the part of the investor the striking conclusion is that portfolio effects are close to zero

individual and aggregate labor supply in heterogeneous agent economies with intensive and extensive margins we develop a heterogeneous agent general equilibrium model that incorporates both intensive and extensive margins of labor supply a nonconvexity in the mapping between time devoted to work and labor services distinguishes between extensive and intensive margins we consider calibrated versions of this model that dier in the value of a key preference parameter for labor supply and the extent of heterogeneity the model is able to capture the salient features of the empirical distribution of hours worked including how individuals transit within this distribution we then study how the various specications inuence labor supply responses to aggregate technology shocks we nd that abstracting from intensive margin adjustment has large eects on the volatility of aggregate hours even if intensive margin uctuates relatively little

nonconvexities retirement and the elasticity of labor supply abstract we consider two life cycle models of labor supply that use nonconvexities to generate retirement in each case we derive a link between hours worked prior to retirement the intertemporal elasticity of substitution for labor ies and the size of the nonconvexities this link is robust to allowing for credit constraints and human capital accumulation by younger workers and suggests values for the ies that are 75 or higher jel d91 j22 j24 j26

do asset demand functions optimize over the mean and variance of real returns a six currency test abstract international asset demands are functions of expected returns optimal portfolio theory tells us that the coefficients in this relationship depend on the variance covariance matrix of real returns but previous estimates of the optimal portfolio 1 assume expected returns constant and 2 are not set up to test the hypothesis of mean variance optimization we use maximum likelihood estimation to impose a constraint between the coefficients and the error variance covariance matrix for a portfolio of six currencies we are able statistically to reject the constraint evidently investors are either not sophisticated enough to maximize a function of the mean and variance of end of period wealth or else are too sophisticated to do so

a life cycle model of health and retirement the case of swedish pension reform abstract sweden is one of the few western economies to have undertaken a large pension reform in recent years this was done with great expectations but little formal analysis in this paper we develop a life cycle labor supply model to quantify the predicted labor supply implications of this reform in our framework individuals choose when to stop working and given eligibility criteria when if to apply for disability and pension benefits agents are heterogeneous in skills and receive exogenous shocks to health throughout their life we find that the new pension system creates large incentives for the continued employment of older workers this is promising news for countries grappling with pension reform and indicates that there are significant lessons to be learned from the swedish case

changes in consumption at retirement evidence from panel data abstract previous empirical literature has found a sharp decline in consumption during the first years of retirement implying that individuals do not save enough for their retirement this phenomenon is called the retirement consumption puzzle we find no evidence of the retirement consumption puzzle using panel data from 1980 to 2000 consumption is defined as nondurable expenditure a more comprehensive measure than only food used in many of the previous studies we find that food expenditure declines at retirement which is consistent with previous studies

the effect of part time work on wages evidence from the social security rules this article identifies the part time wage effect using hours variation caused by the social security rules we show that work hours and wages drop sharply at ages 62 and 65 we argue that the hours decline causes the wage decline resulting in a 25 wage penalty for men who cut their work week from 40 to 20 hours however we find little evidence for such an effect among women we also show that models that fail to account for the joint determination of hours and wages will understate the labor supply response to a tax change by about 26

intertemporal substitution in labor supply evidence from micro data the sensitivity of the supply of labor to intertemporal variation in the wage is an important issue in macroeconomics the analysis of social security and pensions and the study of life cycle patterns of work this paper explores two approaches to the measurement of intertemporal substitution that have appeared in the literature the first approach is to use consumption to control for wealth and unobserved expectations about future wages in the labor supply equation the second approach is to estimate a first difference equation for hours in which labor supply from the previous period serves as a control for wealth and wage expectations the results indicate that intertemporal substitution elasticity for married men is positive but small

tests of asset pricing with time varying expected risk premiums and market betas tests of asset pricing models are developed that allow expected risk premiums and market betas to vary over time these tests exploit the relation between expected excess returns and current market values using weekly data for 1963 through 1982 on ten common stock portfolios formed according to equity capitalization a single risk premium model is not rejected if the expected premium is time varying and is not constrained to correspond to a market factor conditional mean variance efficiency of a value weighted stock index is rejected and the rejection is insensitive to how much variability of expected risk premiums is assumed financial economists have studied valuation models in which securities expected returns are related to the covariances of unanticipated returns with the return on the market portfolio or with other risk factors empirical tests of such models typically have employed unconditional sample moments of returns recent studies provide mounting evidence that expected returns change over time with information such evidence presents an opportunity to develop new approaches for evaluating and implementing asset pricing models that exploit this time variation this paper presents new tests of financial valuation models in which expected returns are allowed to vary over time time series of relative

the effects of health wealth and wages on labour supply and retirement behaviour this paper estimates a life cycle model of labour supply retirement and savings behaviour in which future health status and wages are uncertain individuals face a fixed cost of work and cannot borrow against future labour pension or social security income the method of simulated moments is used to match the life cycle profiles of labour force participation hours worked and assets that are estimated from the data to those that are generated by the model the model establishes that the tax structure of the social security system and pensions are key determinants of the high observed job exit rates at ages 62 and 65 removing the tax wedge embedded in the social security earnings test for individuals aged 65 and older would delay job exit by almost one year by contrast social security benefit levels health and borrowing constraints are less important determinants of job exit at older ages for example reducing social security benefits by 20 would cause workers to delay exit from the labour force by only three months

increasing returns to scale and the reverse flexible accelerator abstract we show that the flexible accelerator principle characterizes optimal investment behavior only when the firm s technology exhibits decreasing returns to scale throughout when there are increasing returns we show that there is a range in which investment increases as the capital stock increases towards its long run equilibrium level

what accounts for the variation in retirement wealth among u s households even among households with similar socioeconomic characteristics saving and wealth vary considerably life cycle models attribute this variation to differences in time preference rates risk tolerance exposure to uncertainty relative tastes for work and leisure at advanced ages and income replacement rates these factors have testable implications concerning the relation between accumulated wealth and the shape of the consumption profile using the panel study of income dynamics and the consumer expenditure survey we find little support for these implications the data are instead consistent with rule of thumb mental accounting or hyperbolic discounting theories of wealth accumulation jel di d91 e21

how social security and medicare affect retirement behavior in a world of incomplete markets this paper provides an empirical analysis of how the u s social security and medicare insurance system affect the labor supply of older males in the presence of incomplete markets for loans annuities and health insurance we estimate a detailed dynamic programming dp model of the joint labor supply and social security acceptance decision focusing on a sample of males in the low to middle income brackets whose only pension is social security the dp model delivers a rich set of predictions about the dynamics of retirement behavior and comparisons of actual vs predicted behavior show that the dp model is able to account for wide variety of phenomena observed in the data including the pronounced peaks in the distribution of retirement ages at 62 and 65 the ages of early and normal eligibility for social security benefits respectively we identify a significant fraction of health insurance constrained individuals who have no form of retiree health insurance other than medicare and who can only obtain fairly priced private health insurance via their employer s group health plan the combination of significant individual risk aversion and a long tailed pareto distribution of health care expenditures implies that there is a significant security value for these individuals to remain employed until they are eligible for medicare coverage at age 65 overall our model suggests that a number of heretofore puzzling aspects of retirement behavior can be viewed as artifacts of particular details of the social security rules whose incentive effects are especially strong for lower income individuals and those who do not have access to fairly priced loans annuities and health insurance

estimation of asset demands by heterogeneous agents we develop optimization models to analyze the demand for financial assets by heterogeneous agents the models extend frankel s j portfolio manage 11 4 1985 18 earlier approach and relax the assumption of normality of asset returns instead we assume that investors maximize an expected utility of terminal wealth based on heterogeneous attitudes toward risk solving a bi level optimization program we endogenously estimate the risk aversion parameters and derive the optimal asset holdings for each agent the models are tested on united states market data explaining the market structure better than previously postulated models

is there a retirement savings puzzle in this paper we ask whether households are saving enough for their retirement we use data on income expenditure and expenditure components to analyse patterns of behaviour at and around the time of retirement for successive date of birth cohorts we compare periods of unemployment to periods of retirement and separate expenditures into categories reflecting work related expenditures basic necessities and other goods we find that income typically falls by more at unemployment than retirement but the reverse is true for expenditure we observe falls in expenditure at retirement for all expenditure categories using a stochastic life cycle model including mortality rates we assess the anticipated impact of retirement on consumption against that of unemployment the inter relationship between goods and leisure explains a large part of the persistent fall in expenditure at retirement we argue that the only way in which the life cycle hypothesis could be reconciled with the remaining unanticipated dip in consumption would be with the systematic arrival of unexpected adverse information at the time of retirement