Main behavioural patterns (optimisation)4.
The model’s labour market outcome depends on the behaviour of the main actors involved. Those are workers (including those eligible to retire) as suppliers of labour, the firms from the demand side, and retired people. It is assumed that actors maximise their individual utility so as to decide, for example, whether to consume now or tomorrow (i.e., to save assets today), whether to supply or demand units of labour, or whether to invest in training and education. All these activities potentially augment individual welfare from different perspectives but are associated with costs and/or disutility. Therefore, for all their activities, actors weigh the associated costs against potential gain. A permanent optimisation problem is the model’s main driving force when producing its outcome in terms of labour market performance. The issue is: what are the decisions to be made by the different actors?
4.1. Workers and mixed group
Optimally choose
- What skill level to acquire at the beginning of their career,
- Hours to be worked,
- Job search effort,
- Labour participation,
- Time investment into training,
- Inter-temporal allocation of consumption (and savings) given time preference and wealth in the current period,
so as to maximise their welfare.
- Acquiring the incremental education in order to obtain the next skill level (youngest agents’ skill choice):
- increases lifetime utility of skills
- induces an incremental educational cost,
- leads to foregone earnings while in education.
- Supplying another hour of work (if job matched):
- increases income over (net) wages,
- effective tax rate is reduced by:
- higher unemployment compensation,
- higher pension entitlements,
- extra severance payment in case of separation,
- but implies disutility of ‘going to work’.
- Supplying another search unit to find a job (if matching is successful):
- increases income over higher employment,
- increases future income over higher productivity (only the employed do job train),
- increases pension entitlement,
- leads to entitlement to further severance payments, but:
- induces effort costs,
- foregoes home production,
- foregoes drawing on unemployment benefits and lump-sum transfers.
- Going for higher participation:
- provides additional (net) labour income if employed,
- leads to entitlement to unemployment benefits if unemployed,
- leads to entitlement to severance payment if fired again,
- increases possible future income over higher productivity,
- induces effort costs:
- search for work,
- go to work,
- go to training,
- foregoes (net) social benefits otherwise received,
- forgoes income from possible home production.
- In addition, the mixed group (eligible for retirement) decides about their optimal retirement age.
- Postponing retirement, in addition to (3) above:
- will lead to (actuarial) surcharges or lower discount on pensions [-> Gruber/Wise],
- will cause actors to forgo (net) pension benefits otherwise received.
- Spending more time on training:
- potentially increases future income through higher productivity,
- induces an effort cost.
- Consumption today:
- will produce additional utility today,
- will come at the expense of tomorrow’s consumption given asset stocks.
4.2. Pensioners
Optimally choose their inter-temporal allocation of consumption on the basis of time preference and wealth given in the current period (see 5. above).
4.3. Firms
Firms optimally chose labour demand and the level of investment (into physical capital). They decide on:
- Vacancies,
- Retention (whether to keep a person once recruited),
- Investment in firm-sponsored training,
- Physical investment.
- Posting another vacancy:
- directly adds to the firm’s value by generating labour productivity;
- qualifies the firm for employment subsidies- induces labour costs (wages, employer’s social contributions),
- induces costs for firm-sponsored training (if any) net of subsidies,
- induces firing costs if worker is fired again,
- induces managerial costs associated to employment.
- Keeping a worker:
- directly adds to the firm’s value by generating labour productivity,
- avoids application of firing costs,
- qualifies the firm for employment subsidies,
- induces labour costs (wages, employer’s social contributions),
- induces cost for firm-sponsored training (if any) net of subsidies.
- Offering firm-sponsored training:
- supplements higher productivity (generating additional value over increased output),
- qualifies the firm for training subsidies,
- will generate training costs,
- leads to higher wage costs (higher productivity, higher output -> higher employment),
- leads to higher potential firing costs.
- Investing in physical capital:
- leads to dividends (yield from the investment net of profit taxes),
- qualifies the firm for subsidies (net of taxes),
- leads to adjustment costs (beyond steady state).