Part-Time Penalties and Heterogeneous Retirement Decisions

Abstract: Older male workers exhibit diverse retirement behaviors across occupations and respond differently to policy changes, influenced significantly by the part-time penalty-wage reduction faced by part-time workers compared to their full-time counterparts. Many older individuals reduce their working hours, and in occupations with high part-time penalties, they tend to retire earlier, as observed in data from Japan and the United States. This study develops a general equilibrium model that incorporates occupational choices, endogenous labor supply, highlighting that the impact on the retirement decision is amplified by the presence of assets and pensions. Using the Japanese Panel Study of Employment Dynamics, I find that cutting employees' pension benefits reduce aggregate labor supply in occupations with high part-time penalties, reducing overall welfare across the economy. Furthermore, a commonly used policy measure-extending the pension eligibility age-is also found to decrease both output and welfare. In contrast, this paper suggests that increasing income tax credits and exempting pension benefits from income taxation can boost labor supply across all occupations. These policies enhance welfare by raising disposable income relative to the reservation wage.