Estimating a Life Cycle Model with Unemployment and Human Capital Depreciation
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1 Estimating a Life Cycle Model with Unemployment and Human Capital Depreciation Andreas Pollak 26 2 min presentation for Sargent s RG // Estimating a Life Cycle Model with Unemployment and Human Capital Depreciation p. /
2 Introduction This paper uses German and American micro data to estimate a life-cycle model with search unemployment. individual human capital stock depends on the employment history the specific institutional arrangements are modeled for each country policy experiments are conducted based on the estimated model Estimating a Life Cycle Model with Unemployment and Human Capital Depreciation p. 2/
3 Model Set-up agents live for L periods can be either employed or unemployed during the first L R periods (L R < L) employees never quit, but face the constant probability λ of being laid off every period unemployed workers receive job offers at the Poisson rate ω gross wage in period j is determined by job specific quality m and individual skill level q: w j = χm j q j skill depreciates by a factor δu per unemployed period and increases by the factor + δ e per employed period skill depreciates by a factor δf when laid off Estimating a Life Cycle Model with Unemployment and Human Capital Depreciation p. 3/
4 Recursive formulation of the agent s problem V j (a j, s j, q j, m j, Ω j ) = max {u j (c j )+βe j V j+ (a j+, s j+, q j+, m j+, Ω j+ )} a j+,m j where s.t a j+ = R(a j + y j c j ), a L+ = u j (c) = f φ j f φ j ln c if γ = c γ γ otherwise ln m N( 2 σ2 m, σ 2 m) Estimating a Life Cycle Model with Unemployment and Human Capital Depreciation p. /
5 Included components of net income y wage social security contribution income tax earned income credit (U.S.) benefits child benefit (Germany) unemployment compensation unemployment assistance (Germany) social assistance (Germany) food stamps (U.S.) pensions supplemental security income ( U.S.) Estimating a Life Cycle Model with Unemployment and Human Capital Depreciation p. 5/
6 Estimation Data sets used German: German Socio-Economic Panel Study (GSOEP) Unite States: Panel Study of Income Dynamics (PSID) Estimation strategy: simulated methods of moments conditional moments to match mean gross labour income mean weeks unemployed per year growth of mean consumption Estimating a Life Cycle Model with Unemployment and Human Capital Depreciation p. 6/
7 Parameters To Be Estimated Table : Parameters to be estimated parameter meaning estimated in stage e growth rate of skills during employment (sample moment) u skill loss per period during unemployment 2 f skill decline at job loss 2 job destruction rate (sample moment) job offer rate 2 m standard deviation of log match quality 2 discount rate 2 relative risk aversion 2 a elasticity of utility w.r.t. family size (OLS) r real interest rate (macro data) scale parameter 2 a constrained to equal 3.; see appendix. Estimating a Life Cycle Model with Unemployment and Human Capital Depreciation p. /
8 Estimation Results Table 2: Estimation results (standard deviations in parenthesis) parameter Germany United States e [per annum].6.2 (.2) (.3) u [per annum] (.3) (.9)..2 f (.3) (.) [per annum]..65 (.3) (.3) [per month] (.9) (2.).2.9 m (.9) (.8) [per annum] (.5) (.9) 3. a 3. a /.8.9 (.38) (.9) r [per annum].33. (.2) (.9) (.52) (.9) a by constraint Estimating a Life Cycle Model with Unemployment and Human Capital Depreciation p. 8/
9 Model Performance gure : Empirical and simulated unemployment rates by age.,,2,5 u,, age de (9-96) simulated (a) Germany,,6,5, u,3,2, age us (9-96) Estimating simulated a Life Cycle Model with Unemployment and Human Capital Depreciation p. 9/
10 Reservation match quality and hazard rates res. match quality ,5 3 2,5 2,5,5,2,,8,6,, age 3 age 5 age 6 age 3 age 5 age 6 (a) reservation match, Germany (a2) hazard rate, Germany res. match quality,6,5,,3,2,, ,8,,6,5,,3,2, age 3 age 5 age 6 age 3 age 5 age 6 (b) reservation match, US (b2) hazard rate, US Estimating a Life Cycle Model with Unemployment and Human Capital Depreciation p. /
11 Policy experiments for Germany,,6,5,,3,2, u age ,35,3,,2,5,,5 policy policy 2 basic model policy policy 2 basic model (a) unemployment rates (b) hazard rates (age 3) ,3,,2,5,, ,35,3,,2,5,,5 policy policy 2 basic model policy policy 2 basic model (c) hazard rates (age 5) (d) hazard rates (age 6) Estimating a Life Cycle Model with Unemployment and Human Capital Depreciation p. /
12 Policy experiments for the U.S.,,35,3,,2,5,, u age ,8,,6,5,,3,2, policy policy 2 basic model policy policy 2 basic model (a) unemployment rates (b) hazard rates (age 3),8,,6,5,,3,2, ,8,,6,5,,3,2, policy policy 2 basic model policy policy 2 basic model (c) hazard rates (age 5) (d) hazard rates (age 6) Estimating a Life Cycle Model with Unemployment and Human Capital Depreciation p. 2/
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