Health and retirement in a structural dynamic setting

This paper provides an empirical analysis of the substitution between the early retirement and disability as two major exit routes from the labour market in Norway. The analysis is based on a dynamic structural model that addresses the interplay between health, institutional constraints and economic incentives of men and women in the later part of their working lives. Unlike most of the previous work which has typically used self reported and indirect measures of disability conditions, I model health as a direct latent indicator of the eligibility to retire through the disability insurance system. The model is specifically designed to account for the random occurrences of the disability conditions and their possible concealment by the individuals in favour of higher utility and broader choice sets in the future. The model is estimated using Norwegian register data. I investigate the substitution effect between the disability and early retirement exits by simulating a complete elimination of the latter. My findings suggest only moderate inflow of the otherwise early pensioners into the disability program.