An agent-based model of labor market participation with health shocks

Abstract

This paper presents an agent-based model of labor market participation, in which a population of agents is affected by adverse health shocks that impact the costs associated with work efforts, and decides whether to leave the labor market. This decision is simply taken by looking at the working behaviors of the other agents, comparing the respective levels of well-being and imitating the more advantageous decision of others. The analysis reveals that such mechanism of social learning suffices to replicate the existing empirical evidence regarding the decline in labor market participation of older people. As a consequence, the paper demonstrates that it is not necessary to assume perfect and unrealistic rationality at the individual level to reproduce a rational behavior in the aggregate.