Salience and labour supply over the life cycle

Many policies have dynamic features, linking actions to outcomes at different points in time. Are people aware of these dynamic features, and how does this affect their choices over the life cycle? This thesis contains three chapters which aim to answer these questions. The first two chapters examine the salience of time limits on entitlement to welfare programmes. In Chapter 1, I identify a feature of policy in the UK which generates a large and foreseeable reduction in benefit income, arising from children ageing out of eligibility for Child Tax Credit. By studying labour supply responses to the benefit reduction, I find evidence that the age-related eligibility rules are non-salient. I also provide evidence of salience increasing through experience. The results also allow me to explicitly rule out a number of competing mechanisms which are indistinguishable from non-salient incentives in other settings but have different implications for welfare and policy. Then, in Chapter 2, I develop a structural model of life-cycle labour supply in which the age-related eligibility rules may be non-salient. I estimate key parameters of the model by indirect inference, matching the empirical results to identify the proportion of claimants who are uninformed of the rules separately from their labour supply responsiveness. I find that nearly 85 percent of claimants are unaware of the benefit rules, and show that the welfare cost of being unaware that the benefit will expire is substantial. Finally, in Chapter 3, I study salience of financial incentives in a different dynamic setting: retirement saving. I exploit the substantial heterogeneity in private pension schemes in the UK to study differential salience of the financial incentive to continue working. I estimate peak value models of retirement, allowing for different responses to incentives from different types of pension. I find that similarly-sized labour supply incentives have different effects depending on the part of the system that generates them, indicating differential salience. And labour supply responses are smaller for individuals with more complex pension arrangements (as measured by the number of pensions they hold).