The Pension Inducement to Retire: An Option Value Analysis

The option value model developed in an earlier paper is used to simulate the effect on retirement of changes in a firm's pension plan compared to the effect of changes in Social Security provisions. The provisions of the firm's pension plan have a much greater effect than Social Security regulations on the retirement decisions of the firm's employees. The analysis supports the following conclusions: (1) Increasing the firm's early retirement age from 55 to 60, for example, would reduce by almost 40 percent, from .48 to .30, the fraction of employees that is retired by age 60. (2) The effect of changes in Social Security rules, on the other hand, would be small. Raising the Social Security retirement ages by one year, for example, has very little effect on employee retirement rates. The proportion retired by age 62 is reduced by only about 4 percent. (3) Changes in Social Security provisions that would otherwise encourage workers to continue working can easily be offset by countervailing changes in the provisions of the firm's pension plan. Firm responses, like delaying the Social Security offset to correspond to m later Social Security retirement age, may simply be m logical revision of current firm plan provisions.

The Effects of the Minimum Wage on the Employment and Earnings of Youth

The employment and earnings effects of the minimum wage are estimated by parameterizing an hypothesized relationship between underlying market employment and wage relationships versus observed wage and employment distributions in the presence of a legislated minimum. If there had been no minimum during the 1973-78 period, we estimate that employment among out- of-school men 16 to 24 would have been approximately 4 percent higher than it in fact was. Among young men 16 to 19 employment would have been about 7 percent higher and among those 20 to 24, 2 percent higher. Employment among black youth 16 to 24 would have been almost 6 percent higher than it was, as compared with somewhat less than 4 percent for white youth. Although it is sometimes argued that the adverse employment effects of the minimum are offset by increased earnings, we find virtually no earnings effect. Had the minimum not been raised over the 1973-78 period, inflation would have greatly moderated the adverse employment effects of the minimum, with approximately two-thirds of the potential employment gains from elimination of the minimum attained. The weight of our evidence is inconsistent with a general increase in youth wage rates with increases in the real minimum. Our findings support the hypothesis that the effects of the minimum are concentrated on youth with sub-minimum market wage rates.

Pensions, The Option Value of Work, and Retirement

The paper develops a model of retirement based on the option value of continuing to work. Continuing to work maintains the option of retiring on more advantageous terms later. The model is used to estimate the effects on retirement of firm pension plan provisions. Typical defined benefit pension plans in the United States provide very substantial incentives to remain with the firm until some age, often the early retirement age, and then a strong incentive to leave the firm thereafter. (This may be a major reason for the rapidly declining labor force participation rates of older workers in the United States.) The model fits firm retirement data very well; it captures very closely the sharp discontinuous jumps in retirement rates at specific ages. The model is used to simulate the effect on retirement of potential changes in pension plan provisions. Increasing the age of early retirement from 55 to 60, for example, would reduce firm departure rates between ages 50 and 59 by almost forty percent.

The Transition from School to Work: The Experiences of Blacks and Whites

Because much of the concern about youth unemployment is motivated by the large differences between the rates for blacks and whites, we have pursued our earlier work by analyzing separately for black and white youth the relationship between high school preparation and early labor force experience. We find no striking differences between the determinants of weeks worked by whites and non-whites upon graduation from high school. Although vocational training in high school bears little relationship to weeks worked upon graduation, hours worked while in high school bear a strong relationship to later employment for students and non-students, white and non-white. Academic performanceas measured by standardized test scores and high school class rank isalso positively related to later weeks worked by non-students, both white and non-white. Young persons find jobs in large part through friends and relatives or through direct application to employers orpossibly a combination of the two. Persons who are not looking forwork--and would then be classified as out of the labor force, according to standard definitions--are apparently quite distinct from personswho are looking for work. Those out of the labor force seem not tobe "discouraged workers" for the most part. Controlling for other individual attributes, non-whites are much more likely than whites to be in a post-secondary school full-time (although without controlling for these attributes the reverse is true). A large proportion of young men in school are also working part-time and a significant number are working full-time. A sizeable proportion of persons in post-secondary schools would be classified as unemployed based on official definitions. Indeed the unemployment rate among these full-time students is generally more than twice the rate among young men not inschool. Few high school graduates are chronically unemployed.

Discontinuous Distributions and Missing Persons: The Minimum Wage and Unemployed Youth

The effects of minimum wage legislation on the employment and wage rates of youth are estimated using a new statistical approach. We find that without the minimum, not only would the percent of out-of-school youth who are employed be 4 to 6 percent higher than it is, but also that these youth would earn more. In particular, the expected hourly earnings of youth with market wage rates below the 1978 minimum are 10 percent lower with the minimum than they would be without it. Thus, an effect of the minimum is to increase the concentration of non-employment among low-wage workers and to reduce their earnings relative to higher wage workers as well. The minimum wage accounts for possibly a third of the difference between the employment rates of black and white youth, according to our results. Our methodology is based on parameterization of the effect of the minimum on the distribution of "market" employment outcomes and market wage rates that would exist in the absence of the minimum. A concomitant of the estimation procedure is joint estimation of market wage and employment functions that would pertain if there were no minimum.

High School Preparation and Early Labor Force Experience

The relationship between high school training and work experience on the one hand and early labor force experience on the other are analyzed in the paper. In addition, the extent and nature of the persistence of early labor force experience is evaluated. The study is based on data for male youths from the National Longitudinal Study of the High School Class of 1972. While there appears to be no relationship between job-related training in high school and post-graduation weeks worked or wage rates, there is a strong relationship between hours worked while in high school and both weeks worked and wage rates in the first four years after graduation. High school class rank and test scores also are positively related to early weeks worked and wage rates in the labor force. It is also found that after controlling for individual specific characteristics of youth, there is little relationship between weeks worked in the first year after high school graduation and weeks worked four years later. And there is almost no relationship between initial wage rates and wage rates four years later, other than those attributable to measured and unmeasured individual specific characteristics. There is little persistence of early experience that cannot be attributed to heterogeneity among youth. There is, however, an effect of early work experience on later wage rates, although it is of modest magnitude in this sample of high school graduates.

Why are Retirement Rates So High at Age 65?

In most data sets of labor force participation of the elderly, an empirical regularity that emerges is that retirement rates are particularly high at age 65. While there are numerous economic reasons why individuals may choose to retire at 65, empirical models that have attempted to explain the age-65 spike have met with limited success. Interpreted another way, while many models would predict a jump in the hazard rate at age 65, the magnitude of the spike indicates excessive response given the economic considerations that retirees typically face. This paper considers the puzzle of why retirement rates are so high at age 65 and explores a variety of explanations.