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Employment Responses to Income Effect: Evidence from Pension Reform

Sebastian Becker, Hermann Buslei, Johannes Geyer () and Peter Haan

No 1941, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: For the design of the pension system, it is crucial to disentangle the employment responses related to the substitution effect and the income effect. In this paper, we provide causal evidence regarding the importance of the income effect, which is generally assumed to be small or non-existent. We exploit a pension reform in Germany that raised pension bene- fits related to children. For the identification, we exploit the discontinuity induced by the reform: only mothers with children born before 1.1.1992 were affected by the pension reform. Children born after this cut-off date did not change pension income. We use a difference-in-differences estimator based on administrative data from the German pension insurance that includes complete individual employment histories. We find that income effects are significant and economically important. We show that the policy led to a reduction in the employment of affected females. Further, we are able to show effect heterogeneity on different dimensions: by treatment intensity, age of the mother, and pre-reform pension wealth.

Keywords: Natural experiment; female labor supply; pension benefit (search for similar items in EconPapers)
JEL-codes: H55 J13 J22 (search for similar items in EconPapers)
Pages: 20 p.
Date: 2021
New Economics Papers: this item is included in nep-age, nep-cwa and nep-eur
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