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Dynamics of informal care, employment, and retirement

2018 Conference Presentation

Informal care Germany

11 September 2018

Dynamics of informal care, employment, and retirement

Thorben Korfhage, RWI-Essen, Germany


Background: Informal caregivers provide valuable services to elderly persons with long-term care needs. However, the literature suggests that informal care has effects on labor marked outcomes, such as employment or retirement. Additionally, there might be linkages between those outcomes that are important for long run effects. Even after a care spell has ended, individuals who have reduced labor supply are confronted with a lower job-offer probability and stay unemployed or retire early because they cannot find a new job. At the same time, caregiver who are just before the legal retirement age might choose to leave their job into unemployment, knowing that they will retire once it is legally possible. In this paper I contribute to the literature by identifying those dynamic linkages, with a special focus on retirement benefits. Furthermore, I discuss implications for inequality in old age. Following the idea that people who have decided to care for somebody during their active labor market years, reduce labor supply, and therefore contributed less to the social pension system, they receive lower pensions once retired as well. Those long-run costs of care provision have rarely been analyzed in the empirical literature.

Method: I set up a dynamic structural single agent model which is solved by dynamic programing and estimated by maximum likelihood. In this model agents can make discrete decisions about their labor supply, their retirement state and whether they want to provide informal long-term care to a parent or spouse. Each choice yields a payoff in the current period but also affects future payoffs due to the transition of state variables. For instance, the probability of receiving a job-offer in the next period crucially depends on the labor marked choice of today’s period. The agent is expected to make decisions based on their current as well as future discounted utility. The model is estimated using the years 2001 until 2014 of the German Socio-Economic Panel (SOEP) which includes nearly 11,000 households and about 30,000 persons each year. One advantage of a structural model is its ability to simulate counterfactual situations such as policy reforms and compare it to the baseline scenario. In a first step I use this approach to estimate the effect of informal long-term care provision on later pension benefits and lifetime earnings. Further, I will simulate a number of policy reforms and evaluate its effects on labor supply, care supply as well as on earnings in old age.

Preliminary Results: Preliminary results suggest that the existence of a relative in need of care reduces the probability of German women to participate in the labor marked. This has adverse effects on later pension benefits and increases the probability of poverty in old age. Opportunity costs of informal long-term care might thus be larger than the literature on short term effects has proposed so far.