Real wage and labor supply in a quasi life-cycle framework: a macro compression by Swedish National Transfer Accounts 1985-2003

This paper examines the life-cycle dynamics of real wages and labor supply in Sweden. The descriptive results lend support to the intertemporal substitution hypothesis (ISH), as the age patterns of both real wages and labor force participation (LFP) are hump-shaped. However, the age-wage profiles increasingly shift towards older ages over time, whereas the age-LFP profiles do not. This leads to an accentuated difference-in-differences of the two variables over the ages 45-64, and, in turn, casts doubt on the explanatory power of ISH for the senior labor supply at the extensive margin. My econometric investigation of old-age LFP further implies that, at least at the aggregate level, the backward-bending supply curve may better reflect the retirement transition rather than intra- and/or inter-temporal substitution. Based on the estimated age-specific elasticities, I found spectacular life-cycle variation in the responses of labor supply to wage change. This suggests that an array of life-cycle parameters (rather than a constant elasticity for all ages) is needed in calibrating the Overlapping Generation Model (OLG).