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Labor Market Status and Transitions during the Pre-Retirement Years: Learning from International Differences
by Arie Kapteyn, James P. Smith, Arthur van Soest and James Banks

Many western industrialized countries face strong budgetary pressures due to the aging of baby boom generations and the general trends toward earlier ages of retirement. The commonality of these problems has the advantage of offering an empirical laboratory for the testing of programmatic incentives on labor force participation and retirement decisions that would not be possible in a single country where programs typically only change very slowly. Once can gauge the effect of policies by analyzing the differences in the prevalence of unemployment, early retirement or work disability across countries. We use the American PSID and the European Community Household Panel (ECHP) to explain differences in prevalence and dynamics of self-reported work disability and labor
force status. To that end we specify a two-equations dynamic panel data model describing the dynamics of labor force status and self-reported work disability. We find that transitions between work and non-work are more frequent in the US than in the 13 European countries we analyze. For self-reported work disability we don’t observe similar differences in transition rates between disability states, although overall Americans are less likely to report work disabilities. Since the difference in outflow out of work between the US and Europe appears to be bigger than the difference in inflow into work, the net result is that if we assign parameters of the US model to the models for the European countries we find lower prevalence of self-repored disabilty, but also fewer Europeans working. One interpretation of this result is that employment protection in Europe is relatively effective in keeping workers with a disability in the labor force.
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