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 summary Why should people work longer? Because they live longer. 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

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

Changes in age structure, Sri Lanka, 2007-2075

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)? Shorter career potential Lack energy Costs of health and life insurance and pensions Less flexible/adaptable Higher salary expectations Health risks absences Knowledge and skills obsolescence Block career paths of younger workers Suspicion about competence (why leave job?) 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 Matija Vodopivec (2007). “Equal Pay for Equal Work? Wage and Productivity Differentials During Slovenia’s Transition” 16

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

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 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)

What will make employers offer more jobs to old workers 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)

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)