Expectations on Wealth Returns: Implications for Labor Supply During the Retirement Boom

Serdar Birinci, Miguel Faria-e-Castro and Kurt See

No 2025-031, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We use an overlapping-generations model with incomplete markets and a frictional labor market to study how assumptions about agents’ expectations of changes in returns to wealth affect labor supply and retirement decisions. Focusing on 2020–23, when returns fluctuated sharply and retirements rose above trend, we find that when individuals internalize the dependence of returns on wealth and view changes in returns as persistent, the model generates counterfactual labor-market outcomes. Retirements fall because expectations of persistently high returns boost labor supply, outweighing wealth effects, and the model predicts retirements concentrated among the very wealthy, contrary to the microdata.

Keywords: labor supply; retirement; heterogeneous returns; incomplete markets (search for similar items in EconPapers)
JEL-codes: E24 G11 J21 J22 J26 (search for similar items in EconPapers)
Pages: 6 pages
Date: 2025-11-17
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DOI: 10.20955/wp.2025.031

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