Estimation of a Life-Cycle Model with Human Capital, Labor Supply and Retirement

Xiaodong Fan (), Ananth Seshadri and Christopher R. Taber

No 29905, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop and estimate a life-cycle model in which individuals make decisions about consumption, human capital investment, and labor supply and use it to analyze changes in Social Security rules. The most important aspect of our paper is human capital towards the end of the life cycle which responds to changes in the rules. Retirement arises endogenously as part of the labor supply decision. The model allows for both an endogenous wage process through human capital investment (which is typically assumed exogenous in the retirement literature), an endogenous retirement decision (which is typically assumed exogenous in the human capital literature), and accounts for the Social Security system. We estimate the model using indirect inference to match the life-cycle profiles of employment and measured wages from the SIPP data. The model replicates the main features of the data—in particular the large increase in measured wages and small increase in labor supply at the beginning of the life cycle as well as the small decrease in measured wages but large decrease in labor supply at the end of the life cycle. We use the model to estimate the effects of various changes to tax and Social Security policies and show that allowing for human capital accumulation is critical.

JEL-codes: J22 J24 J26 (search for similar items in EconPapers)
Date: 2022-04
New Economics Papers: this item is included in nep-age, nep-dge and nep-lma
Note: LS
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Citations: View citations in EconPapers (2)

Published as Xiaodong Fan & Ananth Seshadri & Christopher Taber, 2024. "Estimation of a Life-Cycle Model with Human Capital, Labor Supply, and Retirement," Journal of Political Economy, vol 132(1), pages 48-95.

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