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Wait your turn: Pension incentives, workplace rules, and labor supply among Philadelphia municipal workers

David G. McCarthy and Po‐Lin Wang

Journal of Risk & Insurance, 2022, vol. 89, issue 4, 985-1029

Abstract: Little academic work has examined the labor supply response to pension incentives at the intensive margin. We explore this issue using individual‐level administrative and pension data for Philadelphia city employees, where workers have some choice about whether or not to perform overtime, which is pensionable. We document large variations across workers in the incentives to do overtime provided by pension rules. Although standard regressions show that worker overtime is positively associated with own expected pension compensation, a robust nonparametric approach that exploits the discontinuities in expected wages due to pensions shows that the elasticity of worker labor supply to expected pension compensation is likely zero: Our standard regression results are likely the consequence of the rule by which overtime is allocated in Philadelphia. We estimate that this rule adds 4% to pension costs and raises total compensation costs by around 0.7% of payroll, and examine the implications for pension underfunding.

Date: 2022
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