Here we go again. This time it’s not coming from the mainstream media but from a research study that has a high risk of being misinterpreted. Regardless of the source, the argument that older workers should step aside is as flawed as ever.
The recent study is by the Centre for Economic Policy Research and it is titled, “A Clash of Generations? Increase in Retirement Age and Labor Demand for Youth.” The study concludes that “firms [in Italy] that were more exposed to the increase in employment duration of senior workers significantly reduced youth hirings.” The authors also state that, “Our results clearly indicate that before and after the reform [that increased the retirement age], firms that were more exposed to the increase in employment duration of senior workers significantly reduced youth hirings.”
Spoiler alert: No clash of generations is warranted here.
The findings from the study, while interesting, say little or nothing about the equilibrium impact of delayed retirements on overall youth employment. Indeed, the authors of the study, despite their choice of title, agree that “the retirement age should be as flexible as possible.”
The reason for the apparent discrepancy between the study’s title and the policy recommendation has to do mostly with the way in which the increase in Italy’s retirement age was implemented in the face of labor market rigidities. More importantly, however, research conducted on a single firm or group of firms over a short time horizon is too narrowly focused to draw conclusions about broader economic impacts. For sure, it is true that some younger workers might miss out if their employer postpones the promotion or hiring of a younger worker in favor of retaining an older one. This “boxed-economy” or “lump of labor” view of the world certainly makes sense on the surface as it is intuitive that a one-to-one relationship exists between new retirees and new jobs for younger workers.
The “boxed-economy” logic breaks down, though, when one considers how economies evolve over time. Firms enter and exit and jobs are constantly created and destroyed. Just as a tree sheds its leaves, these changes can be very healthy for an economy as outmoded forms of production make way for new and improved ones. Our economy grows stronger and healthier over time as a result.
It’s been five years since I made this point in a Center on Aging & Work at Boston College AGEnda blog and I would now like to propose two additional ways to address this flawed argument. The first is very straightforward: competition is not good for competitors but it is good for consumers. More older workers make the labor market more competitive; that’s bad for some younger workers, but good for employers and our economy. A more competitive labor market enables the production of more goods and services for a given level of resources. This improved efficiency frees up resources to be used in different ways that can expand our economy and provide new opportunities for everyone, including younger workers.
Second, new business models can disrupt the status quo but the result can be the proliferation of more efficient forms of production. Is it a bad thing if a store goes out of business due to competitive forces? The answer is “Yes,” I suppose, if you’re the worker getting laid off, at least in the short term. The answer is “No” for most everyone else if the store went out of business because it relied on an outdated business model and sold something few people were willing to buy at the store’s sale price. Just think of what a drag on our economy it would have been if Blockbuster video stores were forced to remain open ten years ago. Competitive forces largely drove them out because a more efficient means of production (e.g., on-line streaming) became available. We’re all better off as a result. Similarly, outdated business models and policies that forced older workers out the door have been replaced by ones in which older workers are valued and retained. That’s a good thing, even if some younger workers would have benefited from the outdated model of forcing out older workers.
Another reason this new business model is actually very good news for younger workers is that we truly want older Americans to stay working later in life. Just think of what would happen if they didn’t. Who is going to make up for any financial shortfall if a large portion of older Americans are financially vulnerable at older ages? The answer is younger workers, at least in part. This risk is very real, too, as older Americans are more exposed to market forces than were prior generations as Joseph F. Quinn and I noted in a recent article. Earnings can help solidify older Americans’ financial outlook, which benefits everyone.
For those remaining skeptics, history provides a valuable lesson. Think about what happened after WWII when women entered the labor force in droves. Did that crowd out opportunities for men? For some, yes, in the short term, but overall the result was a booming economy that benefited us all.
So there is no clash of generations. We simply need to look beyond the interim frictional issues associated with extending working lives. Once and for all let’s put to bed the flawed argument that continued work later in life for older workers implies fewer job opportunities for younger ones.