Social security and the search behaviour of workers approaching retirement

José Ignacio García () and Alfonso Ramon Sanchez Martin ()
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José Ignacio García: Centro de Estudios Andaluces

No E2008/10, Economic Working Papers at Centro de Estudios Andaluces from Centro de Estudios Andaluces

Abstract: This paper explores the links between unemployment, retirement and their associated public insurance programs. It is a contribution to a growing body of literature focused on a better understanding of the labor behavior of advanced—age workers, which has gained importance as the pension crisis looms. The analysis combines the development of a new theoretical model and a detailed exploration of the empirical regularities using the Spanish Muestra Continua de Vidas Laborales (MCVL) dataset. The model is a extension of the standard search model, designed to reproduce the non—stationary environment faced by workers approaching retirement and to explore the interaction of unemployment benefits and retirement pensions. Via calibrated simulations we show that the basic empirical reemployment and retirement patterns can be rationalized as the optimal responses to both the labor market conditions and the institutional incentives. Generous Unemployment Benefits (for durations of up to two years) together with very significant early retirement penalties, make optimal to stay unemployed without searching for large groups of unemployed workers. This moral hazard problem can he substantially alleviated through institutional reform. Setting the early retirement penalties according to the age when the individual withdraws from the labor force (rather than when he/she claims the pension for the first time) seems particularly beneficial. It increases the labor supply, reduces the financial cost for the social security system and generate enough extra resources to compensate for the welfare loss of those unemployed directly hit by the reform.

Keywords: Unemployment search; job benefit; retirement (search for similar items in EconPapers)
JEL-codes: J64 J68 J26 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-age and nep-lab
Date: 2008
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Working Paper: Social Security and the search behaviour of workers approaching retirement (2008)
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