Applying labor supply models to older workers

Questions concerning the supply of labor by an individual have been fertile ground for economic researchers since Adam Smith (Spengler). The standard presentation of individual labor-supply decision making evolved through, among other studies, a paper by Lionel Robbins, John Hicks's explication of income-substitution effects in Value and Capital, and a family-context framework formulated by Marvin Kosters. This analysis presents an individual with a constrained maximization problem where, subject to a resource constraint, he attempts to maximize his utility function which includes income and leisure. (Graphic expositions can be found in Fleisher, pp. 38–51, and Rees, pp. 22–4; for a formal presentation, see Henderson and Quandt, pp. 29–37.) Becker provided a framework for examining the allocation of time between market work and home production (i.e., value is placed on hours away from market activity because of the home-produced goods that are generated). More recently, Heckman and Sadik and Johnson, have expanded the time-allocation model to include home production, market work, and investment in human capital over the life cycle.

The most appropriate framework in which to examine the retirement decisions in late life is the life-cycle concept. Many of the factors that influence the withdrawal from the labor force are a function of prior economic decisions. Thus, retirement should be viewed as one of the many resource-allocation decisions that an individual faces throughout life; however, only the most recent theoretical and empirical research has formulated the labor-supply choices of older workers in the life-cycle framework.