Taxes, Wages, and the Labor Supply of Older Americans

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Abstract

The aging of the U.S. population, combined with an increasing probability that any given older individual will work, means that the importance of older workers to the labor force is rising. One possible solution to the solvency problems facing the Social Security System is increasing the labor supply of older workers. Understanding how policy levers can affect the labor supply of the elderly therefore has become increasingly important. In this paper we use data from the Health and Retirement Study (HRS), linked to state identifiers, to estimate the responsiveness of the labor supply of older workers to features of the tax code, on both the extensive margin of participation and the intensive margin of hours of work. This unique data set allows us to avoid some of the traditional pitfalls associated with the labor supply literature. We find evidence that the labor supply of older workers is responsive to the tax structure. Our results suggest that government policies could play a role in increasing the labor supply of individuals over the age of 65 by changing the returns to work through the tax code.

Key Findings

  • A reduction in the marginal tax rate that would increase the payoff to working by 10 percent would increase labor force participation by 7.9 percent among men and 4.9 percent among women.
  • Among working retirees, a reduction in the marginal tax rate that would increase the payoff to working by 10 percent would result in an increase in hours worked of 5.3 percent for men and 3.6 percent for women.

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Project

Paper ID

WP 2006-139

Publication Type

Working Paper

Publication Year

2006
pavement-enterprise