Working Paper: CEPR ID: DP6766
Authors: Francesco Giavazzi; Michael McMahon
Abstract: In 1997 Chancellor Kohl proposed a major pension reform and pushed the law through Parliament explaining that the German PAYG system had become unsustainable. One limitation of the new law---one that is crucial for our identification strategy---is that it left the generous pension entitlements of civil servants intact. The year after, in 1998, Kohl lost the elections and was replaced by Gerhard Shroeder. One of the first decisions of the new Chancellor was to revoke the 1997 pension reform. We use the quasi-experiment of the adoption and subsequent revocation of the pension reform to study how households reacted to the increase in uncertainty about the future path of income that such an event produced. Our estimates are obtained from a diff-in-diff estimator: this helps us overcome the identification problem that often affects measures of precautionary saving. Departing from the majority of studies on precautionary saving we also analyze households' response in terms of labour market choices: we find evidence of a labour supply response by those workers who can use the margin offered by part-time employment.
Keywords: Labour Supply; Policy Uncertainty; Precautionary Saving
JEL Codes: E21; E61; J22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Initial announcement of pension reform (H55) | No adjustment in savings (D14) |
| Revocation of pension reform (H55) | Increase in precautionary savings (E21) |
| Revocation of pension reform (H55) | Increase in labor supply (hours worked) (J22) |