Expectations on Wealth Returns: Implications for Labor Supply During the Retirement Boom

RePEc Short ID: pbi318
ORCID iD: 0000-0001-7323-1932

Birinci, Serdar; Faria-e-Castro, Miguel; See, Kurt

doi:10.20955/wp.2025.031

Working Paper Revision

Expectations on Wealth Returns: Implications for Labor Supply During the Retirement Boom

Abstract: We use an overlapping-generations model with incomplete markets and a frictional labor market to study how assumptions about agents’ expectations of changes in returns to wealth affect labor supply and retirement decisions. Focusing on 2020–23, when returns fluctuated sharply and retirements rose above trend, we find that when individuals internalize the dependence of returns on wealth and view changes in returns as persistent, the model generates counterfactual labor-market outcomes. Retirements fall because expectations of persistently high returns boost labor supply, outweighing wealth effects, and the model predicts retirements concentrated among the very wealthy, contrary to the microdata.

JEL Classification: E24; G11; J21; J22; J26;

https://doi.org/10.20955/wp.2025.031