Social Security, Retirement, and Youth Employment

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...paying for old persons to leave the labor force reduces the employment rate and increases the unemployment rate of youth and of persons in their prime age working years.

Social Security Programs and Retirement around the World: the Relationship to Youth Employment (NBER Working Paper No. 14647) summarizes the results of the fourth phase of an ongoing NBER project that will be published in full by the University of Chicago Press in a book of the same title. The authors of the volume's introduction, Jonathan GruberKevin Milligan, and David Wise report that the studies which comprise this project find no evidence in favor of the common claim that there are a fixed number of jobs into which the young will move when older workers retire. In fact if anything, they find that generous government retirement benefits, which lead to more retirement by older workers, end up hurting the employment status of younger workers. "In short, these results provide no evidence that inducing older persons to leave the labor force frees up jobs for the young. If anything, the opposite is true; paying for old persons to leave the labor force reduces the employment rate and increases the unemployment rate of youth and of persons in their prime age working years," they write.

The ongoing project involves studies for a number of countries by analysts in those countries. The volume includes these country-specific analyses as well as an introduction and a summary of the results. The first phase of the project described the retirement incentives inherent in plan provisions and documented the strong relationship across countries between social security incentives to retire and the proportion of older persons out of the labor force. The second phase documented the large effects that changing plan provisions would have on the labor force participation of older workers. The third phase examined the fiscal implications that extending labor force participation would have on net program costs -- reducing government social security benefit payments and increasing government tax revenues

This phase of the project investigates the relationship between the labor force participation of older persons and the labor force participation of younger persons in twelve countries. The results are based on several methods of analysis. Some of the results are based on sharp policy changes in various countries. These policy changes often led to large movements in the employment of older workers. By examining the work behavior of the young during these episodes, the authors study the impact of elderly employment on the young.

In Germany, for example, 1972 legislation allowed older workers to retire earlier than 65 and to still receive full social security benefits. Within four years, the employment rate of people aged 55 to 64 fell 7 percentage points. But in 1992, Germany reversed course. A new reform phased in lower benefits for early retirement and, effectively, reduced the incentive to leave the labor force. Within nine years of those measures taking effect, the employment rate of older workers rose 9 percentage points.

What happened to German youth employment during that time? It followed the trend of older workers in the 1970s, falling 2 percentage points. Youth unemployment rose 1.7 percentage points at the same time. After the 1990s reform, when older people's labor participation rose, youth employment stayed the same and unemployment actually fell slightly. The results were essentially the same when the authors controlled for economic growth and other factors. Much the same story took place in France and, to a lesser degree, in the United Kingdom. The authors find that an increase in employment of older people generally increased youth employment and decreased youth unemployment.

Looking across twelve countries, the authors find that the employment of older and younger workers moves together rather than in opposite directions. Taken together, these nations saw an increase in employment among people aged 55 to 64 during the past 10 to 15 years -- on average, a rise of 8.1 percentage points. Youth employment also rose 4.7 percentage points and youth unemployment fell 2.6 percentage points. The six countries with the greatest increase in the employment of older workers saw the largest increase in youth employment and the greatest decrease in youth unemployment.

"In short, the overwhelming weight of the evidence, as well as the evidence from each of the several different methods of estimation, is contrary to the boxed economy proposition. We find no evidence that increasing the employment of older persons will reduce the employment opportunities of youth," the authors conclude.

-- Laurent Belsie