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Latent Work Capacity and Retirement Expectations

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Abstract

Understanding how health decline influences retirement decisions is fundamental for the design of targeted policies that encourage working longer. While there is wide agreement on the relevance of age-related health decline for determining labor supply and retirement decisions, the process of how health deterioration affects labor supply remains a black box. This paper explores the match between individuals’ functional abilities and job demands in the national economy using a new methodology to measure work capacity. Specifically, we construct a one-dimensional measure of individuals’ work capacities by comparing an individual’s own ability levels to the levels needed to perform different occupations, using new data containing individuals’ ratings of the same 52 abilities included in the Occupational Information Network (O*NET) database. We find that a one-unit increase in the fraction of jobs for a given education level that an individual can do — our measure of work capacity — is associated with a 15 to 21 percentage point increase in labor force participation, a 10 to 17 percentage point decrease in the percentage of respondents receiving SSDI benefits, a 7 to 10 percentage point increase in the subjective percent chance individuals will work longer, a 9 to 12 percentage point increase in the chance that retired individuals will return to the labor force, and a 17 to 25 percentage point increase in the chance that individuals with disabilities will return to the labor force. The magnitudes of these associations are all economically relevant and exist even when controlling for health status.

Key Findings

  • Our unique data on self-reported abilities show that average abilities overall (across 52 abilities) and across four domains—cognitive, psychomotor, physical, and sensory ability—are high relative to average occupational demands obtained from O*NET database.
  • Age-related declines in ability, overall and across domains are modest. Over the life-cycle, physical abilities decline the most, then psychomotor and sensory abilities, and cognitive abilities declining the least. As a result, observed age-declines in ability are largely inframarginal to job demands, and therefore work capacity is relatively stable with age.
  • Alternative measures of work capacity are predictive of current labor supply outcomes. An increase in work capacity from being unable to do any job to being able to do all jobs given the individual’s education level is significantly associated with a 15 to 21 percentage point increase in labor force participation and a 10 to 17 percentage point decrease in the percentage of recipients of Social Security Disability benefits.
  • Work capacity is also predictive of subjective expectations about future labor force participation decisions. An increase in individual’s work capacity from being unable to do any job to being able to do all job given the education level is associated with a 7 to 10 percentage point increase in chance that current workers will work past age 65 or 70 (depending on the individual’s age), a 9-12 percentage point increase in the chance that retired individuals will return to the labor force, and a 17 to 25 percentage point increase in the chance that individuals with disabilities will return to the labor force.

Citation

Lopez Garcia, Italo, Nicole Maestas, and Kathleen J. Mullen. 2019. “Latent Work Capacity and Retirement Expectations.” Ann Arbor, MI. University of Michigan Retirement and Disability Research Center (MRDRC) Working Paper; MRDRC WP 2019-400. https://mrdrc.isr.umich.edu/publications/papers/pdf/wp400.pdf

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Project

Paper ID

WP 2019-400

Publication Type

Working Paper

Publication Year

2019