Labor Market Search and Optimal Retirement Policy

Joydeep Bhattacharya, Casey B. Mulligan, Robert R. Reed III

NBER Working Paper No. 8591
Issued in November 2001
NBER Program(s):Aging, Economic Fluctuations and Growth, Labor Studies, Public Economics

A popular view about social security, dating back to its early days of inception, is that it is a means for young, unemployed workers to 'purchase' jobs from older, employed workers. The question we ask is: Can social security, by encouraging retirement and hence creating job vacancies for the young, improve the allocation of workers to jobs in the labor market? Using a standard model of labor market search, we establish that the equilibrium with no policy-induced retirement can be efficient. Even under worst-case parameterizations of our model, we find that public retirement programs pay the elderly substantially more than labor market search theory implies that their jobs are worth. An important effect, ignored by the popular view, is that the creation of a vacant job by a retirement reduces the value of other vacant jobs.

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Document Object Identifier (DOI): 10.3386/w8591

Published: Joydeep Bhattacharya & Casey B. Mulligan & Robert R. Reed, 2004. "Labor Market Search and Optimal Retirement Policy," Economic Inquiry, Oxford University Press, vol. 42(4), pages 560-571, October. citation courtesy of

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