Thesis advisor: Alicia H. Munnell / This thesis focuses on the employment of older workers and addresses the following questions: how people make their retirement decision, how changes in the Social Security benefit rules can encourage older workers to stay in the labor force longer, and what impediments older workers face on the labor market that can prevent them from working longer and interrupt their retirement plans. As the U.S. population ages, retirement and Social Security claiming decisions of older workers will have a significant impact on the U.S. economy. By the year of 2030 about 20 percent of the population will be 65 years old or older. The national retirement system generates less income in retirement than it did in the past. Rising Full Retirement Age, the shift of the private pension system from predominantly defined benefit to predominantly defined contribution pension plans, and increasing longevity will have to force older workers to stay in the labor force in the future to provide adequate income in retirement. Chapter one presents a dynamic stochastic retirement model that incorporates observed heterogeneity in educational attainment level. The assumption is that educational attainment level is highly correlated with the characteristics, such as preferences for work, types of jobs, and financial planning horizon that determine timing of retirement. A parsimonious model that incorporates heterogeneity in educational attainment level and stochastic earnings and health predicts the labor force participation rates and Social Security rates by age accurately. This model provides intuition for why college graduates tend to claim Social Security benefits and exit labor force later in life - longer life expectancy, non-physically demanding jobs, longer financial planning horizon, and deriving positive utility from work encourage college graduates to retire later. Chapter two develops and tests a policy rule regarding the availability of reduced early Social Security retirement benefits that would encourage older workers to stay in the labor force longer without amplifying the hardship on the more vulnerable population. The availability of Social Security retirement benefits at the current Earliest Eligibility Age (EEA) is considered the main impediment to longer working lives. Raising the EEA is thus considered the most powerful channel to raise the labor force participation rate. But raising the EEA would create hardship among workers with low private savings who are unable to work or find employment until the higher eligibility age. This study proposes and analyzes a new approach to setting each worker's EEA based on an individual's average lifetime earnings--an Elastic EEA. Low average lifetime earnings will likely reflect either poor health or spotty work histories, both of which are associated with weak employment prospects and limited financial resources at age 62. Tying the EEA to the average lifetime earnings could thus protect many of these vulnerable workers while encouraging longer working lives and increasing Social Security monthly benefits for workers more capable of remaining in the labor force. Simulations suggest that an Elastic EEA would achieve its goal in providing higher employment rates and levels of consumption in retirement compared to the status quo. These simulations also demonstrate the limitations of structural retirement models used to estimate the effect of raising the EEA. By assuming the same probabilities of losing and finding a job for all individuals, these models underestimate the adverse effect of raising the EEA on the more vulnerable population. Although some older workers may like to stay longer in the labor force, they may have hard time holding on to their jobs due to displacement. Chapter three is devoted to the trends in displacement of older workers. Conventional wisdom says older workers are less likely to be displaced. However, the difference in displacement rates between younger and older workers disappeared in the 2006 Displaced Worker Survey (DWS). The increased vulnerability of older workers appears to be the reason for this convergence. To better understand the age-displacement relationship, this study takes advantage of the availability of job tenure information and consistent design of the DWS since 1996. Using a Blinder--Oaxaca decomposition, it analyzes the effect of changes in tenure, industry mix, and educational attainment on the displacement rates of younger and older workers. The results show that older workers are now more likely to be displaced than prime-age workers, conditional on education, manufacturing industry, and tenure. / Thesis (PhD) — Boston College, 2009. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.