| This study analyzes the effects of Disability Pension and Old-Age Pension system on employment, unemployment, and retirement decision of old male workers. In particular, we focus on two questions. One is how various social insurance programs provide old males, especially unhealthy ones, an incentive to exit from the labor force. The other is how much the difference between LFPR of Korean old males and that of U.S. old males can be explained either by the difference in social insurance programs or by the difference in preference for leisure. To answer these questions, we formulate, solve, and estimate a dynamic discrete choice model of employment and retirement with a finite lifetime in which Disability Pension and Old-Age Pension program play central roles on the labor supply decision of old male workers. First, the model is calibrated to see whether it replicates certain patterns of labor force participation rate taken from Korean and U.S. aggregate labor data. Second, with this positive result from the aggregate analysis, we use the method of simulated moments (MSM) approach to estimate the model's parameter. The result from the estimation implies that the difference in social insurance programs between Korea and U.S.A. is the most important factor of the differences in LFPR of the two countries. Policy experiments show how sensitive individual workers' labor supply decisions are with respect to certain policy changes on social insurance systems. |
