Time Averaging Meets Labor Supplies of Heckman, Lochner, and Taber

Sebastian Graves, Victoria Gregory, Lars Ljungqvist and Thomas Sargent

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

Abstract: We add endogenous career lengths to the Heckman, Lochner, and Taber (1998a) (HLT) model with its credit markets and within-period labor supply indivisibilities, all of which are essential features of Ljungqvist and Sargent (2006) “time-averaging.” A benchmark social security system puts all workers at corner solutions of their retirement decisions. That lets our model reproduce most outcomes in HLT’s model with its inelastic labor supply and mandatory retirement date for all types of workers. Eight types of workers are indexed by pairs of innate abilities and choices of education levels. Tax and social security arrangements can dislodge some types of agents from those corners, bringing associated changes in equilibrium prices, college enrollments, and on- the-job human capital accumulations. A reform that links social security benefits to age but not to employment status eliminates an implicit tax on working beyond age 65. High tax rates with revenues returned lump-sum keep agents off corner solutions, raising the aggregate labor supply elasticity and threatening to bring about a “dual labor market” in which many people decide not to supply labor.

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: 80 pages
Date: 2023-05-29, Revised 2025-01-08
New Economics Papers: this item is included in nep-age, nep-dge and nep-lma
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Working Paper: Time Averaging Meets Labor Supplies of Heckman, Lochner, and Taber (2023)
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DOI: 10.20955/wp.2023.012

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