Nataliya (Natasha) Gimpelson

Job Market Paper

Disentangling the Roles of Preferences and Shocks in Labor Supply

Labor supply differs across people, even for the same levels of wages and assets. These differences can be driven by heterogeneity in preferences or by shocks to employment opportunities. Disentangling the two forces is important for policy but difficult to do in practice. I show that retirement decisions and their interactions with assets and labor history help to tell preferences and shocks apart. I document that wealthy people retire later and people with higher prime-age labor supply retire earlier. These facts can be jointly rationalized by the presence of preference heterogeneity and labor market constraints. I quantify the roles of preferences and shocks by calibrating a life-cycle model with endogenous retirement decision to German SOEP data. The model requires significant heterogeneity in bequest motives and allocates a big role to labor market constraints. Labor market shocks explain 50% of total variation in prime-age employment, while preferences explain 10%.