Correspondence: Mário Centeno, Banco de Portugal, Av. Almirante Reis, 716, Lisbon 1150-012, Portugal. Tel: +351 213130837; Fax: +351 213130837; E-mail: Mario.Centeno@bportugal.pt

¹completed his PhD in Economics in 2000 from Harvard University. Presently, he is with Banco de Portugal (Portugal Central Bank) and ISEG/Universidade Técnica de Lisboa, Portugal. His research interests include labour economics and job search theory. His recent publications include 'Tenure, business cycle and the wage setting process', European Economic Review, 2006, Vol. 50, No. 2, pp. 401–424; 'The impact of unemployment insurance generosity on match quality distribution', Economics Letters, 2006, Vol. 93, No. 2, pp. 235–241.

²completed his PhD in Economics in 2007 from ISEG/Universidade Técnica de Lisboa. Presently, he is with CAEN/Universidade Federal do Ceará, Brazil. His research interests include labour economics and job search theory. His recent research includes 'Job matching, technological progress and worker-provided on-the-job training'.

Received 21 June 2008; Revised 21 June 2008.

Abstract

Our objective is to investigate the effect of unexpected changes in worker financial obligations on retirement decisions. We considered throughout this paper that a firm is unable to determine the right moment in which a particular worker should retire. We found that wage rates decrease when a worker obtains the right to retire and that retirement benefits should be more attractive than the unemployment insurance in order to have workers migrating from unemployment to retirement, while retirement benefits do not need to be higher than wages to have worker flows from employment to retirement. We also verified that the more difficult it gets to obtain the right to retire, the higher the job creation flow shall be and that worker reservation obligations have an ambiguous effect on retirement rates.