Sectoral Choice with Human Capital and Accumulation of Pension Benefits

Universal pension plans and large public-sector workforces affect accumula-tion and allocation of human capital. The benefit reforms and re-training pro-grams being considered in many countries are likely to affect behavior in ways that can only be analyzed within forward-looking models of lifetime labor sup-ply. Using Norwegian panel data on three birth cohorts, this paper develops and estimate a life-cycle model of public- and private-sector employment. The model of sequential career-choices builds on Keane and Wolpin (1997), extend-ing the accumulation of skills to be sector-specific and allowing unobserved, non-deterministic depreciation of skills. The Norwegian retirement benefits are modeled in a way that builds on the discretization approach of Rust and Phelan (1997), and identification is aided by exploiting how current career-choices affect future expected benefits. I find important heterogeneity in skill accumulation. The model is used to analyze the effect of a pension reform on sector-specific labor supply. The reform has large effects on labor supply, but the sectoral effects are small