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A computational model of labor market participation with health shocks and bounded rationality

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Abstract

This paper presents a computational agent-based model of labor market participation, in which a population of agents, affected by adverse health shocks that impact the costs associated with working efforts, decides whether to leave the labor market and retire. This decision is simply taken by looking at the working behaviors of the other agents, comparing the respective levels of well-being and imitating the more advantageous decision of others. The analysis reveals that such mechanism of social learning and imitation suffices to replicate the existing empirical evidence regarding the decline in labor market participation of older people. As a consequence, the paper demonstrates that it is not necessary to assume perfect and unrealistic rationality at the individual level to reproduce a rational behavior in the aggregate.

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Fig. 1

Source: first wave of the English Longitudinal Study of Ageing (ELSA)

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Notes

  1. This is an Herculean task requiring, among other things, to estimate transition probabilities from one state to all possible future states based on beliefs which, in turn, depend on 26 parameters to be determined. Other questionable assumptions include “rational expectations,” a notion according to which all individual subjective probabilities equate the “objectively estimable population probability” and that requires the capability to anticipate regulatory changes. The paper acknowledges several times that only some justification for such assumptions can be provided.

  2. The data used to draw the curves in Fig. 1 are taken from Table 4A.3 in the Annex 4.1—tables on work and retirement of the first wave of the ELSA survey. http://www.elsa-project.ac.uk/reportWave1.

  3. As mentioned previously, pensioners and pension income can also be interpreted as people who decide to leave the labor market and receive a subsidy and the corresponding disability benefit, respectively.

  4. Simulations are performed using the BehaviorSpace tool in NetLogo, which allows to specify the grid of parameter values and the number of simulations for each point in the grid.

  5. These seven classes of age correspond to the ones presented in Table 4A.3 in the Annex 4.1—tables on work and retirement of the first wave of the ELSA survey.

  6. In this setup, the term “equilibrium” differs from the concept of Nash equilibrium because our agents, keeping fixed the choices of their peers, are always willing to change their working status as long as they meet another similar agent with a higher well-being.

  7. On the contrary, the pension income \(y^\mathrm{p}\) is assumed fixed to an arbitrary value in the model simulations.

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Correspondence to Alessandro Moro.

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The views expressed in the paper are those of the authors and do not involve the responsibility of the Bank of Italy.

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Moro, A., Pellizzari, P. A computational model of labor market participation with health shocks and bounded rationality. Knowl Inf Syst 54, 617–631 (2018). https://doi.org/10.1007/s10115-017-1096-3

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