Retirement in a Life Cycle Model of Labor Supply with Home Production

Published: 2009


We analyze the forces that can generate retirement in different versions of standard life cycle models of labor supply. While nonconvexities in production can generate retirement, we show that the size of nonconvexities needed increases sharply as the intertemporal elasticity of substitution for labor decreases. In a model with home production, we show that these models imply a large increase in time devoted to home production at retirement. This is contrary to what is found in the ATUS data. We suggest that nonconvexities in the enjoyment of leisure time may be a promising alternative feature to generate retirement.

Key Findings

    • A theory of retirement is needed to assess budgetary implications of Social Security reforms.
    • Models of retirement imply large labor supply responses to changes in the design of Social Security, but are not consistent with data on labor supply and wages.
    • Home production time increases by only a small amount at retirement.
    • We show that changes in home production time at retirement are an important element in assessing theories of retirement.