Government Old-Age Support and Labor Supply: Evidence from the Old-Age Assistance Program

Fetter and Lockwood investigate Old Age Assistance (OAA), a means-tested program, to address important questions. What are the effects of government old-age support on late-life labor supply? What is the relative importance of the two key features of these programs: transfers to older people, and taxation of their labor? And to the extent that taxation is important, how large are the associated welfare costs to recipients? The study also sheds light on the extent to which OAA and Social Security contributed to the great decline in labor force participation among older males over the 20th century. The experts’ findings illustrate that OAA can explain half of the large 1930-40 drop in labor force participation of men aged 65 to 77, and the study shows that a significant share of the men who exited the labor force because of OAA had poor labor market prospects. The data show that Social Security had the potential to drive a significant share of the mid-century decline in late life labor supply. Fetter and Lockwood ask what the role of government old-age support should be, especially when their numbers from a reformed, relatively modest Social Security model results in, still, a large negative effect on labor supply.

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