LIVE LONGER, WORK LONGER: MAKING IT HAPPEN

IN THE LABOR MARKET

Milan Vodopivec The World Bank

International Forum on Pension Reform:Exploring the Link to Labor and Financial Market Reforms

June 7 – 9, 2007 Bled, Slovenia

Road map and summary1. Why should people work longer?

Because they live longer.2. Why is it difficult to make this happen?

Because workers do not want to work longer, and because employers are lukewarm about old workers.

3. Why do (some) people work longer? Mostly because they are forced to do so. Even in US, financial need is the single most important incentive to work longer.

4. So what should be done so that people could work longer?Improve choices to attract workers, and remove obstacles that prevent employers from offering more jobs to old workers

1. Why should people work longer?

• Ageing of population: falling fertility, rising life expectancy

• Share of old people predicted to rise sharply

Slowdown of growth/reduction of labor supply will become a drag on economic growth, and it is not clear whether this can be offset by the rise in productivity

Demographic ageing, share of aged 60 and more, 2000-2050

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2000 2010 2020 2030 2050

Asia

OECD

Latin America

North Africa

Sub-Saharan Africa

Changes in age structure, Sri Lanka, 2007-2075

2007

6 5 4 3 2 1 0 1 2 3 4 5 6

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10-14

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Population (%)

Male Female

2025

6 5 4 3 2 1 0 1 2 3 4 5 6

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Population (%)

Male Female

2050

6 5 4 3 2 1 0 1 2 3 4 5 6

0-4

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30-34

40-44

50-54

60-64

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80+

Population (%)

Male Female

2075

6 5 4 3 2 1 0 1 2 3 4 5 6

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10-14

20-24

30-34

40-44

50-54

60-64

70-74

80+

Population (%)

Male Female

In near future, many countries will face labor force reductions

And we spend fewer years in work than in non-work

Why would it help if people work longer?

• In the US, if people continue to retire at 63, they are going to face a severe decline in living standards

• Working longer:– directly increases person’s current income,– allows a person to accumulate more savings – and

investment earnings on savings – and/or increase pension benefits, and

– shortens the period over which people have to support themselves with their retirement assets.

2. Why is it difficult to make working longer happen?

• Because many people do not want to work longer -- are happier in retirement than before, and

• because employers are lukewarm about employment old workers.

Falling average retirement age of men, USA, 1910-2001

Source: Burtless and Quinn (2002). “Is Working Longer The Answer for an Aging Workforce?”, Center for Retirement Research, Boston College.

How happy are retirees? (US)

Source: Bender and Jivan (2005). “What Makes Retirees Happy?”, Center for Retirement Research, Boston College.

Employers’ perceptions about old workers

Old workers are viewed as:

• more reliable, and having better skills and work ethic,

• but less suitable for training, and resistant to change and to learning new technologies.

Why are employers reluctant to hire old workers (US survey)?

1. Shorter career potential 2. Lack energy3. Costs of health and life insurance and pensions4. Less flexible/adaptable5. Higher salary expectations6. Health risks absences7. Knowledge and skills obsolescence8. Block career paths of younger workers9. Suspicion about competence (why leave job?)10.Fear of discrimination suit

Evidence about labor mobility of old workers

Older workers:

• do not face greater risk of displacement (permanent, involuntary job loss), but

• they are much less likely to get a job after losing one, and

• they face much larger post-displacement wage losses (in Slovenia, about 30 percent)

Are old workers less productive than young ones?

Evidence suggests so – but the relationship is non-linear, with large differences across individuals and tasks. – After age of 50, physical and mental ability

start to decline – Old workers also lack the ability to adjust to

changes: evidence from productivity studies based on matched employer-employee data

– In contrast, some verbal abilities remain virtually unchanged also late in the life cycle.

Slovenia: Differences in productivity and relative wages by age, 1992-2001

Omitted group: Individuals less than 30 years old.

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1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Age 30-39 Age 40-49 Age 50+

Wag

e D

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1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Age 30-39 Age 40-49 Age 50+

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Matija Vodopivec (2007). “Equal Pay for Equal Work? Wage and Productivity Differentials During Slovenia’s Transition”

3. Why do (some) people work longer?

• Because they have to (inadequate incomes when they are older).

• But also due to new trends:– More flexible forms of employment– Old workers are becoming healthier– Satisfaction from work

Having to work longer -- evidence from US

• 1 out of 4 workers in the US would like to continue working after the age at which similar workers retired earlier because they do not have sufficient resources

• Collapse of the stock market in 2001 caused the increase of LFP rate of workers aged 55-64 by 2 percentage points (from 60% to 62%)

Having to work longer:Sri Lanka - retirement status, by prime-

age employment type and age

(a) Regular public sector w orkers

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100%

55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75

Retired Work part_time Work full_time

(c) Casual w orkers

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100%

55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75

Retired Work part_time Work full_time

Reversal of LFP rates for old men since early 1990s, US

What explains the reversal in retirement trends in US?

• Not favoring early retirement any more -- reversal of incentives: reduction of benefits upon retirement, keeping (part of) pension income if working

• New trends appearing in the last twenty years:– more flexible jobs for older workers (more part-time

and “bridge” jobs), particularly among educated and well-off workers;

– erosion of mandatory retirement provisions

– older workers are healthier

Older Americans with any kind of disability, by age, 1984-2005 (%)

What explains the reversal in retirement trends in US?

What makes retirees happy?• Being economically well off (income and wealth)• Ability to choose: those who are forced to retire

are much less happy• Good health• Having a job!!Source: Bender and Jivan (2005). “What Makes Retirees Happy?”, Center

for Retirement Research, Boston College.

4. So what should be done so that people could work longer?

• What will make people work longer? Improving choices

• What will make employers offer more jobs to old workers? Removing obstacles

What will make people work longer?Improving choices

• More money – making retirement incentives right

• Flexible work arrangements

• Better health

Implicit tax rates on continued work for males (at av. age of retirement, OECD)

Flexible work arrangements: part-time work is higher for old workers, OECD, 2004

Ill-health is the main reason for retirement for casual workers in Sri Lanka (2006)

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55 56-60 61-65 66-70 71-75Age of retirement

health

wrk_related

personel

What will make employers offer more jobs to old workers?

Removing obstacles

• Adjusting wage setting mechanism• Getting employment protection legislation

right• Preventing age discrimination• Increasing mandatory retirement• Changing employer attitudes• Improving employability of old workers –

introducing lifelong learning

Adjusting wage setting mechanism: relative wages of old workers exceed

relative productivity, Slovenia (1992-2001)

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Relative productivity Relative wage

Consequences of seniority wages Korea and Japan

• A relatively low age of mandatory retirement.

• Few workers after 55 (60 in Japan) are retained in their existing jobs.

• To get a job, many have to shift to part-time or temporary work, with considerable reduction in earnings.

Strict employment protection legislation hurts hiring of old workers

Preventing age discrimination

• By antidiscrimination law? – In US, a law prohibits age-based discrimination

through hiring, firing, layoffs, compensation.

– In practice, “the law may have only limited benefits and significant costs. Although the laws provide a boon for older men who remain in their jobs and are more difficult to fire, they harm those seeking new employment.”

• Information campaigns to promote age diversity

Improving employability of old workers – lifelong learning

• Among barriers to employability, every OECD country stated low incidence of adult training, especially after 50.

• But employers may be reluctant: in Slovenia in 2004, 45% of workers participated in skill development (11 pp more than in 1987) – but few workers aged 50 and above, because employers did not pay for their training.

Training of older workers and expected pay-back period, OECD (1999-2004)

Improving training for old workers

• The larger the expected pay-back period, the higher the willingness of employers to pay for training

• Promote lifelong learning: training of young workers will increase the likelihood of training later in their careers

• Adjust training courses to the needs of older workers (way of training, short courses, strong links to workplace)