Do Pensions Enhance Worker Effort and Selection? Evidence from Public Schools

Why do employers offer pensions? We empirically explore two theoretical rationales, namely that pensions may improve worker effort and worker selection. We examine these hypotheses using administrative measures on effort and output in public schools around the pension-eligibility notch. When workers cross the notch their effective compensation falls significantly, but we observe no reduction in worker effort and output. This implies that pension payments do not increase effort. As for selection, we find that pensions retain low-value-added and high-value-added workers at the same rate, suggesting pensions have little or no influence on selection.