State dependence and unobserved heterogeneity in the employment transitions of the over-50s

Abstract

This paper examines employment transitions among men and women in the UK aged between 50 and the state pension age. We use a fourth order Markov model to estimate quarterly transitions while allowing for potential endogeneity of initial conditions. The results reject exogeneity of initial conditions and show the importance of state dependence. We compare the results to those obtained with a younger sample and find evidence of a sorting process over the life-cycle whereby men’s employment transitions are increasingly characterized by state dependence while, for women, unobserved heterogeneity becomes more important. We discuss some potential policy implications of the results.