An Equilibrium Model of Pension Provision and Wage Determination

This paper proposes and estimates a structural model of screening by employer-provided pensions. The model illustrates how employed workers are sorted into jobs with pension plans and jobs without pension plans according to their time preferences and human capital levels. It also explains why firms provide pension plans and why workers with pensions earn more than workers without pensions. The basic structure of the workers ' side of the model is a precautionary saving model with heterogeneity in discount rates, human capital accumulation, and pension asset accumulation. In the model, workers with low discount rates (low discounters) work harder and stay longer with an employer, and accumulate more human capital stocks. On the employers ' side of the model, there are firms that have an incentive to hire these workers due to a fixed cost of hiring a worker. Firms cannot observe workers ' time preferences due to asymmetric information, so the firms with a fixed cost of hiring make contributions to pension plans and offer relatively low human capital rental rates so that only workers who place higher values on future income are attracted by their offer and low wage today discourage high discounters to take their offer. Although this paper focuses on 401(K) plans, the basic idea can be applied to other forms of employer-provided pensions, which is one of the biggest advantage of the idea of screening by employer-provided pensions. The model is estimated by using U.S. data. The estimation results show how workers are sorted into jobs with pension plans and jobs without pension plans. The result of a counter-factual simulation shows that the tax benefit of 401(K) plans has a great impact on the way of workers to be sorted into jobs with pension plans and jobs without pension plans