Time Averaging Meets Heckman, Lochner, and Taber and Ben-Porath

Wed, 01 Jan 2025 00:00:00 +0000

Research question and motivation: How does endogenizing retirement (career-length) choice change the labor-supply and human-capital implications of the canonical Heckman, Lochner, and Taber (1998a, HLT) life-cycle general-equilibrium model, and what does this imply for social-security reform, labor-income taxation, aggregate labor-supply elasticities, and inequality? HLT already contains two ingredients of Ljungqvist-Sargent (2006) “time-averaging” models — credit markets and within-period labor-supply indivisibilities — but shuts time-averaging down by assuming inelastic labor supply until a mandatory retirement age of 65. The authors “activate” time-averaging by letting workers choose when to retire and by adding a pay-as-you-go social security system. This matters because the micro-foundation of the high aggregate labor-supply elasticity that Prescott invoked (switching from Rogerson’s employment lotteries to time-averaging) hinges on whether workers sit at corner solutions for career length.

Subjective Earnings Risk

The paper introduces a survey instrument — fielded in the Copenhagen Life Panel in January 2021 to about 10,900 employed Danes aged 20-65 — that measures how much earnings risk workers subjectively perceive over the year ahead, conditioning explicitly on whether they expect to stay in their job, quit, or be laid off. Linking each survey response to third-party-reported Danish administrative records provides multiple credibility checks: survey-reported past earnings, job-transition probabilities, and time out of work line up closely with their registry counterparts. The central finding is that subjective earnings risk is many times smaller — the authors report administratively-estimated risk being between two and six times higher — than the risk conventionally inferred from the cross-sectional dispersion of realized earnings growth. The authors attribute this gap to heterogeneity: even within narrow age-and-earnings cells, workers differ systematically in expected earnings growth, so pooling them misassigns predictable differences in means to luck (a mixture-distribution / Jensen’s-inequality argument), and the gap is largest where expected-growth heterogeneity is largest, such as among young workers. Possible job transitions are shown to be central to the level and the higher-order shape (skewness, kurtosis) of subjective risk. When a standard life-cycle search-and-matching model (Menzio, Telyukova, and Visschers, 2016) is calibrated to the administrative data in the usual way, its model-implied beliefs imply far higher individual earnings risk than workers report, whether or not they switch jobs — which the authors read as highlighting the value of survey-based measures for disciplining such models.

Victoria Gregory | Macro Paper Warehouse

Time Averaging Meets Heckman, Lochner, and Taber and Ben-Porath

Subjective Earnings Risk