Association for Public Policy Analysis & Management

Working longer benefits individuals’ cognitive function through social engagement and cognitive stimulation at work place. It is also associated with higher lifetime income and Social Security benefits. At the societal level, a longer working life alleviates the financial burden on the Social Security Trust Fund, which is estimated to run dry by 2030s. And it generates more public revenue and ensures the economic prosperity.

A negative cognitive shock may reduce one’s productivity and decrease his/her probability of working. Current studies affirm that a negative health shock leads to a 2 to 14 percentage point decrease in the probability of working. However, few studies specifically explore the effect of cognitive decline on labor supply, which is an important aspect of health.

It is worth noting that different aspects of cognitive function (memory, speed of processing information, and knowledge) change differently with age. As a result, the distribution of cognitive decline at middle age (50 to early 60s) remains unclear.

This paper fills these literature gaps by utilizing a widely-accepted survey data that measures cognition, the Health and Retirement Study (HRS), to quantify the distribution of cognitive decline and its effect on labor supply among workers aged 50 to 61 from 1996 to 2014. The sample size is 20,142. This study reduces the measurement error by excluding extreme values and defining a long-term individual-specific trend of cognitive decline. This paper assumes that a sharp decline in cognitive function (defined as 1 or more standard deviation decline in cognitive score) over two years is an exogenous health shock after controlling for socioeconomic status (SES) and shocks in other health conditions (heart disease, diabetes, hypertension, stroke, and obesity). In addition, this research utilizes an individual fixed-effect model to eliminate the omitted bias due to individual idiosyncratic factors. Other covariates include changes in marital status, income, wealth, and occupation.

I find that 12 percent of older workers aged 50 to 61 experience a sharp cognitive decline over 2 years, leading to a 2.5 percentage point decrease in the subjective probability of working at age 62. The size of this negative effect is larger among female and cognitively - demanding occupations, such as professional and sales occupations.

This study provides labor policy implications and points out that the improvement in cognitive function may increase older adults’ health capacity to work longer thus alleviate individual and societal financial burdens. Additionally, this paper suggests improving the public awareness of cognitive decline at middle age so that individuals, families, and the society can plan to prevent or delay this decline, or minimize its financial loss. The awareness about cognitive decline among women and workers in cognitive-demanding occupations are particularly important as these groups are more likely to reduce labor supply due to cognitive decline.