Late career job loss and the decision to retire

Abstract

This article provides an empirical analysis of the effect of involuntary job loss on the lifetime income and labor supply of older workers. I develop and estimate a dynamic programming model of retirement with savings, costly job search and exogenous layoffs. The average cost of job loss is equivalent to one year of pre-displacement earnings, 70% due to the wage reduction and 30% to the search frictions. Displaced workers on average retire fourteen months earlier. Workers who approached retirement during the Great Recession will work approximately five months longer in response to the contemporaneous financial and labor market shocks.