The Effect of the Employee Pension on the Labor Supply of the Japanese Elderly

In Japan today, the ratio of elderly to nonelderly in the general population is increasing at a rate nearly twice that of other developed nations. This rapidly aging population has given rise to two important policy issues in Japan: (1) the need to maintain the fiscal health of the pension system as the demand for retirement benefits increases, and (2) the need to create employment opportunities for older people who are able and willing to continue working. Both issues are related to, and affected by, the effects of public pensions on the labor supply, but little is known about the way these factors interrelate in Japan. To begin to fill this information gap, this Note formulates labor supply models, with corrections for selectivity bias, based on an estimate of the effects of the employee pension on both the decision to remain in the labor force and the number of hours worked per week. The study's findings indicate that the employee pension has a significant negative effect on the decision of older Japanese workers to remain in the labor force and on the average number of hours worked by older workers.