Time Averaging Meets Heckman, Lochner, and Taber and Ben-Porath

Sebastian Graves, Victoria Gregory, Lars Ljungqvist and Thomas Sargent

No 2023-012, Working Papers from Federal Reserve Bank of St. Louis

Abstract: The Heckman, Lochner, and Taber (1998a) (HLT) model includes credit markets and within-period labor supply indivisibilities, two essential features of Ljungqvist and Sargent (2006) “time-averaging” models. But by assuming inelastic labor supplies until a mandatory retirement age, it shuts down time-averaging. We activate time-averaging by endogenizing retirement ages. Our addition of a baseline social security system puts all workers at corner solutions of their retirement decisions, letting our model reproduce most outcomes in HLT’s model. By dislodging workers from those corners, social security and tax reforms raise the aggregate labor supply elasticity and can bring about a “dual labor market.” HLT’s Ben-Porath human capital technologies generate steeper earnings profiles for college-educated workers that in our model make their labor supplies more resilient to tax and social security reforms than high school workers’ labor supplies. But nonconvexities inherent in the Ben-Porath technologies can bring “tipping points” at which tax increases cause workers who at lower tax rates had chosen long careers and made substantial human capital investments to jump discretely to choosing much shorter careers and doing much less on-the-job human capital accumulation.

Keywords: time averaging; labor supply elasticity; retirement; taxation; Laffer curve; social security reform (search for similar items in EconPapers)
JEL-codes: E24 E60 J22 J26 (search for similar items in EconPapers)
Pages: 90 pages
Date: 2023-05-29, Revised 2025-10-19
New Economics Papers: this item is included in nep-age, nep-dge and nep-lma
Note: Publisher DOI: https://doi.org/10.1016/j.red.2025.101309
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in Review of Economic Dynamics

Downloads: (external link)
https://doi.org/10.20955/wp.2023.012 Full text (application/pdf)

Related works:
Journal Article: Time Averaging Meets Heckman, Lochner, and Taber and Ben-Porath (2026)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:96238

Ordering information: This working paper can be ordered from

DOI: 10.20955/wp.2023.012

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of St. Louis Contact information at EDIRC.
Bibliographic data for series maintained by Scott St. Louis ().