Abstract
The financial viability of the nation’s Medicare and Social Security programs has come into question as older adult workers, in particular members of the baby-boomer generation, begin to voluntarily retire. Obviously, any deterioration in the health of older adults will inevitably increase pressure on the Medicare system. However, if older adults respond to changes in their health by reducing their labor supply, than this will also increase demand for the Social Security system. Using data on married and employed couples from the Health and Retirement Study (HRS), this paper determines how the labor supply of each member of a married couple is influenced by changes in the health, assets and medical expenditures of the other member of the couple. Therefore, adding to the extant literature as we determine how the labor supply of an individual responds to health shocks visited on their spouse. We find that the labor supply of both males and females is influenced by their own health shocks and health shocks suffered by their spouses.
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Notes
These studies do not give any consideration to spousal characteristics.
“Arguably larger than financial considerations” (McGarry 2004).
Obviously, the reverse is also true. There are strong economic reasons why a wife’s decision to retire would be influenced by her own shocks and those shocks upon her husband.
This “added worker effect” (AWE) has long been recognized in the literature (see Mincer 1962).
McGarry (2004) suspects that the lack of significance for the objective health measures is due to the lack of observations.
Therefore, we are considering retirements over a two year time frame. It is unlikely that individuals in this cohort will return to work after a two year absence. In fact, we find this to be the case in our data.
Recall, this will allow us to mitigate any justification bias that results from an individual exaggerating health status as a way to justify an exit from the labor force. Consider, it is possible that an individual may exaggerate a self-reported change in health status to justify an exit from the labor force. Less likely, though, is the case that an individual would be untruthful regarding a change in a diagnosis. For instance, it may be the case that between t − 1 and t an individual will report that their health status has declined from good to poor as a “justification” for leaving the labor force. However, it is less likely that an individual will report that they were diagnosed with cancer as a justification for leaving the labor force when, in fact, that diagnosis was not made.
A common concern with this literature is that the health shock will not be seen empirically because we are not looking at the correct age group. Therefore, to mitigate this concern we take a sample the is equivalent in the average age of retirement to what we observe in the Current Population Survey data.
Real income includes all income from jobs and financial assets and is adjusted for inflation.
We report the marginal effects and the standard errors are adjusted for clustering.
Having additional years of data provides significant value added. Use of objective health measures to identify an effect on retirement changes has been problematic since early studies, such as McClellan (1998), have not had sufficient observations to identify an affect of health shocks on retirement.
Note that the sample sizes will adjust from the married sample to accommodate the observations that lack spousal data.
These results are robust to various changes in the data. To mitigate any concern that our sample is “unhealthy” and that we are picking up the cumulative effect of health shocks, we continue to segment the data to investigate the impact of a health shock on a individual who has yet to be diagnosed with any of the health shocks we can measure. We find that the qualitative effects do not differ. We find the same qualitative differences in the response of males and females to their spouse’s health shock.
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Acknowledgments
The author would like to thank two anonymous reviewers and Mike Grossman for their useful comments and suggestions. Additionally, Paul Jensen, Vibhas Madan, Bruce McCullough, participants in the IAES meetings, and participants in the seminar series at Lehigh University have made useful comments and suggestions on earlier drafts of this manuscript.
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McGeary, K.A. How do health shocks influence retirement decisions?. Rev Econ Household 7, 307–321 (2009). https://doi.org/10.1007/s11150-009-9053-x
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DOI: https://doi.org/10.1007/s11150-009-9053-x