Too Old To Work, Too Young To Retire?

in collaboration with Guido Schwerdt ([email protected]), Rudolf Winter Ebmer ([email protected]) and Josef Zweimuller ([email protected])

French President Nicolas Sarkozy had to strike a special deal with the train drivers in order to alleviate recent strikes by French rail workers protesting against increasing their minimum retirement age. Similar debates arose in Italy when the former government wanted to increase retirement age from 57 to 60; Prime Minister Prodi has agreed now on a compromise with the unions to raise it only to 58 years by next year. Due to increased longevity of pensioners and financial stress in public pay-as-you-go pension systems many other countries – including Austria, Germany and Switzerland – have debated and/or resolved to similar measures.

Increasing the retirement age in order to solve Europe’s pension problems seems to be a quick and obvious solution to the demographic changes – provided these older workers can find and keep their jobs for those additional years they have to spend on the labour market. Otherwise, public costs for the unemployment insurance system will do away with some or most of the savings in the pension accounts. Empirical evidence on employment prospects of older workers is mixed. Existing non experimental studies on the productivity of older workers show inconclusive results: On the one hand, productivity reductions at older ages are particularly strong when problem solving, learning and speed as well as physical strength are important; on the other hand older individuals maintain a relatively high productivity level in work tasks where verbal abilities and organizational skills matter more. While task-specific aging is widely documented, overall productivity in a job depends not only on being quick and adept in specific tasks, but also on experience, which can counter these aging processes by better knowledge of processes and organization. Employment prospects of older workers do depend on their relative productivity but also on the flexibility of the wage system.

To shed light on the issue of whether and to what extent older workers’ have worse employment prospects, we use a quasi-experimental approach. We analyze social security records of 11,578 workers from all the Austrian firms with more than 4 employees that went bust between 1982 and 1988. These workers were matched according to a large set of observable characteristics (including previous wage and employment history) with 36,777 workers extracted from 1,087,705 Austrian employees in plants that never closed down in the same period. This made it possible to compare employment and earnings prospects of elderly (age 45-55) relative to similar prime-age (age 35-44) workers in the displacement and non-displacement groups.

The main findings are that:

Immediately after a plant closure, employment rates of 45-55 year old workers decline by 3 percentage points more than the employment rates of 35-45 year old workers compared with subjects in the corresponding age cohorts who were never displaced. However, the displaced old catch up with the displaced young over time. The initial 3 percentage point age-penalty for displaced workers vanishes after 5 years and turns even negative thereafter. In other words, the employment gap between displaced and non-displaced becomes eventually smaller for the old than for young. There were no significant differences between age cohorts in the effect of a plant closure on the earnings of the displaced workers who find a new job relative to the never displaced, with the possible exception of evidence for the end of the period of observation (more than 5 years after plant closure) in which the wage losses of the re-employed old appear slightly larger.

These findings can be understood as a combination of demand effects that prevail immediately after displacement and supply effects that kick in later. Older workers tend to be paid more than their actual productivity in continuing jobs for incentive reasons. But after a plant closure, the market offers them a wage that matches their productivity and is thus lower than their previous wage. Facing these unattractive offers, the displaced old workers are initially reluctant to lower their ‘reservation wage’ enough to ensure the same employability as the young. And this reluctance is reinforced by severance payments which increase with tenure on the job and thus are typically higher for older workers. But with the passage of time, the shorter time horizon of the old induces them to lower their reservation wage in order to find a job before retiring, and this explains the observed catching up

We believe that these findings are relevant for the debate on the opportunity of increasing the retirement age in the presence of Pay-As-You-Go pension systems with an aging population. While many fears that keeping older workers for a longer time in the market would only increase their unemployment rate, our evidence suggests that increasing the retirement age does not necessarily produce individuals who are ”too old to work but too young to retire”.

Cross-posted from VOX with authorization from the authors.