Career Length: Effects of Curvature of Earnings Profiles, Earnings Shocks, and Social Security

February 2010
Thomas J. Sargent, Lars Ljungqvist

A finitely lived worker confronts a labor supply indivisibility, chooses when to work, and smooths consumption by trading a risk-free bond. A schedule maps cumulative time worked into current earnings. With a specification of preferences that assures balanced growth, the more elastic are earnings to accumulated working time, the longer is a worker’s career. Negative (positive) unanticipated earnings shocks reduce (increase) the career length of a worker holding positive assets at the time of the shock, while the effects are the opposite for a worker with negative asset holdings. The elasticity of lifetime labor supply is as high as the elasticity of aggregate labor supply in a corresponding employment lottery model. Government provided social security can attenuate responses of career length to earnings profile slope and earnings shocks by creating implicit taxes that induce a worker to retire at an official retirement age.