Labour Supply after Inheritances and the Role of Expectations
| DOI | http://doi.org/10.1111/obes.12353 |
| Author | Nico Pestel,Karina Doorley |
| Date | 01 August 2020 |
| Published date | 01 August 2020 |
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©2020 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd.
OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 82, 4 (2020) 0305–9049
doi: 10.1111/obes.12353
Labour Supply after Inheritances and the Role of
Expectations*
Karina Doorley,†,‡,§ and Nico Pestel§,¶
†Economic and Social Research Institute (ESRI), Dublin, Ireland
‡Trinity College Dublin, Dublin, Ireland (e-mail: karina.doorley@esri.ie)
§IZA Bonn, Bonn, Germany
¶ZEW Mannheim, Mannheim, Germany
Abstract
This paper examines the effect of inheritances on labour supply, distinguishing between
unanticipated and anticipated inheritances. We use household and individual level micro-
data for Germany to investigate the effect of inheritances on a number of labour market
outcomes. Women are less likely to work full-time after an inheritance and their desired
and actual hours of work decrease by 1–2 per week, on average. The magnitude of the
effect is found to be larger and more precisely estimated for households without children
and liquidity constrained households. Other margins such as time use outside the labour
market and satisfaction are also found to be affected by inheritance receipt.
I. Introduction
In many OECD countries, inheritances make up a largershare of national income today than
they did during the last century because the rate of return on private wealth has generally
exceeded national income growth over the last few decades. This means that wealth is
capitalized at a faster rate than national income so that old wealth is more important than
new wealth in the 21st century (Piketty, 2014). In this context, it becomes important to
understand how the transmission of wealth across generations affects the labour market
behaviour of heirs because inheritances can be considered as substitutes for labour in
income generation. This is crucial for policy makers who are interested in increasing the
supply of labour or in reducing wealth or income inequality.
If leisure is a normal good, we can expect that inheritances reduce lifetime labour
supply as households can consume the windfall and any capital income accruing to it over
their lifetime. However, labour supply responses to wealth shocks depend on whether they
were anticipated or not. In the case of an unanticipated inheritance, labour supply may
change after the inheritance as the individual reacts to the windfall. Employed windfall
JEL Classification numbers: D31, J22.
*We thankThomas Dohmen, Andrea Weber and Bertrand Verhey-den as well as participants of several seminar
and conference presentations for helpful comments and suggestions.
844 Bulletin
recipients whose utility increases with leisure and consumption will reduce hours of work
after receiving the inheritance and supplement their consumption from labour earnings
with consumption from the windfall. However,if an individual receives an inheritance that
is completely anticipated, as is quite plausible in countries such as Germany where parents
are forbidden by lawfrom disinheriting their children, this inheritance will not affect labour
supply and consumption after it has been received as it will already have been taken into
account in the optimal choice of labour supply from the beginning of the life cycle. Rather,
heirs will use the inheritance to repay any loans that they took out in order to smooth their
consumption prior to the inheritance. With imperfect or partial anticipation of windfalls,
we may expect labour supply to change both before (in anticipation) and after (to adjust
for the imperfect anticipation) the windfall.
This paper contributes to the literature by evaluating the effect of inheritances on the
labour supply behaviour of the workingage population, distinguishing between anticipated
and unanticipated inheritances. We focus on Germany, a country that is characterized by
a strongly ageing society, a high level of wealth inequality as well as a sharply increasing
aggregate value of assets, implying a growingimpor tance of future inheritances. Hence, the
behavioural effects of inheritances will become more and more relevantas a determinant of
employment structure. We use survey micro-data which provides detailed information on
the expectation of future windfalls and consider employment margins, actual and desired
hours of work, time use and satisfaction measures. The data on windfall expectations,
desired labour supply, time use and life satisfaction is quite unique and usually unavailable
in larger administrativedata sets typically used in the related literature. Indeed, there is little
evidence to date about how time is reallocated from labour or howlife satisfaction changes
following an inheritance.A further novelty of this paper to the literature is an examination of
potential mechanisms behind labour supply responses to inheritances, such as the presence
of children, liquidity constraints and the flexibility of employment.
Wefind that both actual and desired hours of work by women decrease by about 1–2 per
week in response to an inheritance and this effect is larger and more precisely estimated
for unanticipated inheritances. An examination of the extensive margin of labour supply
indicates that this is largely driven by reductions in full-time work. We find no robust
evidence that the effect is sensitive to the size of the inheritance but we do find larger
effects in households with children, liquidity constrained households and East German
households. We find little consistent evidence that employment or hours worked by males
change after an inheritance, except for the case of males without children.
Previous literature has shown that gains in household wealth affect labour supply de-
cisions in various ways, both at the extensive margin, through early retirement (Krueger
and Pischke, 1992; Brown, Coile and Weisbenner, 2010; Bloemen, 2011) and participa-
tion (Holtz-Eakin, Joulfaian and Rosen, 1993; Bloemen and Stancanelli, 2001) and at the
intensive margin through hours worked (Joulfaian and Wilhelm, 1994; Henley, 2004; Bo,
Halvorsen and Thoresen, 2016) and labour income (Elinder, Erixson and Ohlsson, 2012;
Bo et al., 2016; Cesarini et al., 2017; Picchio, Suetens and van Ours, 2018). Alternatively,
a financial windfall can serve to finance the start-up or the extension of a business and,
hence, increase the likelihood of becoming or staying self-employed(Holtz-Eakin, Joulfa-
ian and Rosen, 1994a,b; Lindh and Ohlsson, 1996; Blanchflower and Oswald, 1998; Hurst
and Lusardi, 2004). Bo et al. (2016) study the effect of inheritances on labour supply in
©2020 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd.
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