Social Security and the job search behavior of workers approaching retirement

This paper explores the links between unemployment, retirement and their associated public insurance programs. The analysis combines the development of a life-cycle model of search and retirement with a detailed exploration of the empirical regularities using a Spanish administrative data-set based on employment histories. Our ultimate goal is to uncover the relative contribution of bad institutional incentives versus poor labor demand to the observed low reemployment rates of Spanish workers aged 55 or over. We find that the low labor supply of the unemployed younger than 60 (the minimum retirement age) is, according to our model, largely the product of the poor conditions in the Spanish labor market. The disincentives in the regulations would not stop these workers from searching if presented with higher job offer rates. In sharp contrast, improvements in incentives will make a real difference for workers over 60. In particular, we explore the effects of changing the pension rules to link early retirement penalties to the age when the individual stops paying contributions. This reform removes the incentive to stay unemployed without searching, encouraging individuals to either retire or actively engage in a search process. As a result, the implicit fnancial liabilities of the pension system are reduced, to the extent that it would be possible to compensate all the workers that suffer direct welfare losses through the reform.