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Does the welfare state make older workers unemployable?
Gilles Saint-PaulTSE
Why is the labor market for the elderly different?
• Small remaining career time
• Falling productivity
• High rent component of total wage
Figure 1: the evolution of skills over the life cyle; source: Avolio and Waldman (1994)
Consequences
• Large losses of older workers who lose their jobs
• Greater likelihood of working in secondary sector
• Unemployment benefits more damaging to employment of older workers
• Firing costs have a smaller effect on employability (if age-neutral)
• Hiring costs have a larger effect
Example of age-specific EP
• The « Delalande » contribution
• Additional firing cost after 50
• In 1993, was liberalized and no longer applied to those hired after 50
• Behagel et al. (1998) have studied this experiment
Findings
• Monthly job finding rate of the 50+ increased by 0.5 %
• Strong substitution effects: reform made the 50+ more employable than the 50-
• Delalande tax reduced layoffs
• Effect on preventive layoffs positive but very small.
The role of hiring costs
• PDF of net profits lower for older workers• Willingness to pay hiring cost lower
• Hiring costs therefore reduce the relative demand for older workers
• This is the « endgame » effect: under HC employability falls with distance from retirement
Figure 2: employment of older workers across countries. Source: Hairault et al. (2008)
A simple model
• People live for T units of time• Initial productivity yH
• With prob. p(s), falls to yL
• Fixed wage w• Hiring cost H• Firing cost F(s)
– F(s) = F0, s < s*
– F(s) = F1, s > s*
The dismissal decision
s
yL
Figure 3: the firing frontier
s*
s
yL
Figure 4: effect of tighter employment protections* s
~
The hiring decision
Three regimes:
• A: employability falls with age (endgame effect dominates throughout)
• B: employability is hump-shaped, due to a falling firing premium
• C: employability M-shaped, due to a large step in firing costs
The elderly in a flexible and rigid labor market
• France vs. US• Compare the relative outcomes of the
elderly in both countries, by education x sex group
• Outcome variables:– Employment rates– Unemployment– Transitions– Wages– Wage losses
A. Employment rates
• The dominant picture is that of a strong endgame effect
• Employment rates for 55-60 much lower in France than US
• This squares with the above model
16 to 2021 to 25
25 to 3031 to 35
36 to 4041 to 45
46 to 5051 to 55
56 to 6061 to 65
France
US
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
Figure 9: Employment rate, men, high-school dropouts
France
US
16 to 2021 to 25
25 to 3031 to 35
36 to 4041 to 45
46 to 5051 to 55
56 to 6061 to 65
France
US
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
Figure 10: Employment rates, men, high school graduates
France
US
16 to 2021 to 25
25 to 3031 to 35
36 to 4041 to 45
46 to 5051 to 55
56 to 6061 to 65
France
US
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
Figure 11: Employment rates, men, some college
France
US
21 to 2525 to 30
31 to 3536 to 40
41 to 4546 to 50
51 to 5556 to 60
61 to 65
France
US
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
Figure 12: Employment rates, men, college graduates
France
US
16 to 2021 to 25
25 to 3031 to 35
36 to 4041 to 45
46 to 5051 to 55
56 to 6061 to 65
France
US
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
Figure 13: Employment rates, women, high school dropouts
France
US
16 to 2021 to 25
25 to 3031 to 35
36 to 4041 to 45
46 to 5051 to 55
56 to 6061 to 65
France
US
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
Figure 14: Employment rate, women, high school graduates
France
US
16 to 2021 to 25
25 to 3031 to 35
36 to 4041 to 45
46 to 5051 to 55
56 to 6061 to 65
France
US
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
Figure 15: Employment rates, women, some college
France
US
21 to 2525 to 30
31 to 3536 to 40
41 to 4546 to 50
51 to 5556 to 60
61 to 65
France
US
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
Figure 16: Employment rate, women, college graduates
France
US
Group France US F/US
Men, HSD 0.57 0.71 0.80
Men, HS 0.66 0.84 0.79
Men, CD 0.62 0.84 0.73
Men, Coll G 0.89 0.90 0.99
Women, HSD 0.66 0.69 0.94
Women, HS 0.69 0.84 0.81
Women, CD 0.62 0.89 0.70
Women, Coll G 0.90 0.90 1.0
Table 1 – Relative employment rates of older workers by categories
B. Unemployment rates
• Large increase in UR in the mid-40s in France vs. the US.
• This may be due to lower demand, due to eg Delalande
• However, entitlement effect is more likely to operate here
16 to 2021 to 25
25 to 3031 to 35
36 to 4041 to 45
46 to 5051 to 55
56 to 6061 to 65
France
US
0.0
5.0
10.0
15.0
20.0
25.0
Figure 17: Unemployment rate, men, high-school dropouts
France
US
16 to 2021 to 25
25 to 3031 to 35
36 to 4041 to 45
46 to 5051 to 55
56 to 6061 to 65
France
US
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Figure 18: Unemployment rates, men, high school graduates
France
US
16 to 2021 to 25
25 to 3031 to 35
36 to 4041 to 45
46 to 5051 to 55
56 to 6061 to 65
France
US
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Figure 19: Unemployment rates, men, some college
France
US
21 to 2525 to 30
31 to 3536 to 40
41 to 4546 to 50
51 to 5556 to 60
61 to 65
France
US
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Figure 20: Unemployment rates, men, college graduates
France
US
16 to 2021 to 25
25 to 3031 to 35
36 to 4041 to 45
46 to 5051 to 55
56 to 6061 to 65
France
US
0.0
5.0
10.0
15.0
20.0
25.0
Figure 21: Unemployment rates, women, high school dropouts
France
US
16 to 2021 to 25
25 to 3031 to 35
36 to 4041 to 45
46 to 5051 to 55
56 to 6061 to 65
France
US
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Figure 22: Unemployment rate, women, high school graduates
France
US
16 to 2021 to 25
25 to 3031 to 35
36 to 4041 to 45
46 to 5051 to 55
56 to 6061 to 65
France
US
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Figure 23: Unemployment rates, women, some college
France
US
21 to 2525 to 30
31 to 3536 to 40
41 to 4546 to 50
51 to 5556 to 60
France
US
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Figure 24: Unemployment rate, women, college graduates
France
US
Job finding rate
• Very strong endgame effect in France compared with US
• Both entitlement and endgame effects play a role for those workers
• The unskilled are particularly affected additional role of minimum wage?
• Midlife discount in unemployment rates due to lower job loss rates and greater flows to non participation for older workers
Figure 27: job finding rate
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
21 to 25 25 to 30 31 to 35 36 to 40 41 to 45 46 to 50 51 to 55 56 to 60 61 to 65
France
United States
Job loss rate
• Older workers fairly protected from job loss in France
• But very substantial transition to non participation
Figure 25: E->U transitions
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
21 to 25 25 to 30 31 to 35 36 to 40 41 to 45 46 to 50 51 to 55 56 to 60 61 to 65
France
United States
Figure 26: E-->non E transition
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
21 to 25 25 to 30 31 to 35 36 to 40 41 to 45 46 to 50 51 to 55 56 to 60 61 to 65
France
United States
High School Dropout
High School Some college College
Prime age 25-50
3.46 4.01 2.77 4.17
51-55ratio
2.10.61
2.30.58
4.31.55
0.6 0.14
56-60ratio
1.80.52
0.3 0.08
9.33.35
1.80.42
61-55ratio
0.80.22
0.00
5.01.80
0.00
Table 2 – Job loss rate (E->U), men, France
High School Dropout
High School Some college College
Prime age 25-50
4.13 3.07 2.46 3.09
51-55ratio
3.7 0.90
1.71.18
0.90.35
2.40.77
56-60ratio
1.30.31
1.40.63
0.00
0.00
61-55ratio
0.20.05
4.91.59
0.00
0.0 0
Table 3 – Job loss rate (E->U), women, France
High School Dropout
High School Some college College
Prime age 25-50
4.68 3.39 2.48 2.53
51-55ratio
3.60.77
2.80.83
3.91.58
1.70.66
56-60ratio
5.4 1.14
1.8 0.51
1.7 0.66
2.1 0.81
61-55ratio
0.7 0.14
1.6 0.46
3.11.24
1.70.66
Table 4 – Job loss rate (E->U), men, United States
Wages
• Wages go up with age in France• They are hump-shaped in the US• Suggests wage formation in France
makes older workers overpaid• Exacerbates entitlement effect• Creates support for differential
employment protection
Figure 28: median wage, France, men
0,0
5,0
10,0
15,0
20,0
25,0
30,0
35,0
21 to 25 25 to 30 31 to 35 36 to 40 41 to 45 46 to 50 51 to 55 56 to 60 61 to 65
High School dropouts
High school
Some college
College graduates
Figure 29: wages, women, France
0,0
5,0
10,0
15,0
20,0
25,0
21 to 25 25 to 30 31 to 35 36 to 40 41 to 45 46 to 50 51 to 55 56 to 60 61 to 65
High school dropout
High school
Some college
College graduates
Figure 30: median wage, USA, men
0,0
5,0
10,0
15,0
20,0
25,0
21 to 25 25 to 30 31 to 35 36 to 40 41 to 45 46 to 50 51 to 55 56 to 60 61 to 65
High School dropouts
High school
Some college
College graduates
Figure 31: wages, women, USA
0,0
2,0
4,0
6,0
8,0
10,0
12,0
14,0
16,0
18,0
20,0
21 to 25 25 to 30 31 to 35 36 to 40 41 to 45 46 to 50 51 to 55 56 to 60 61 to 65
High school dropout
High school
Some college
College graduates
Wage losses
• Evidence suggests that wage losses are going up with age
• Effect slightly higher in the flexible economy (US) (counterpart of higher job finding rates)
Age category France United States
16-30 -0.041(0.015)
-0.063(0.016)
31-40 -0.128(0.021)
-0.215(0.021)
41-50 -0.199(0.026)
-0.369(0.022)
51-65 -0.201(0.039)
-0.225(0.030)
Table 6 – Wage loss following unemployment spell, all workers (s.e. in parentheses)
Age category France United States
16-30 -0.047(0.021)
-0.044(0.021)
31-40 -0.099(0.032)
-0.177(0.027)
41-50 -0.217(0.039)
-0.383(0.029)
51-65 -0.245(0.058)
-0.151(0.040)
Table 7 – Wage loss following unemployment spell, men (s.e. in parentheses)
Age category France United States
16-30 -0.0350.023
-0.0670.024
31-40 -0.1480.028
-0.2580.031
41-50 -0.1830.036
-0.3610.033
51-65 -0.1610.054
-0.3100.044
Table 8 – Wage loss following unemployment spell, women (s.e. in parentheses)
Figure 32: Wage effects of unemployment, by age
-0,35
-0,3
-0,25
-0,2
-0,15
-0,1
-0,05
0
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
France
United States
Figure 33, wage effects of unemployment spells, men
-0,3
-0,25
-0,2
-0,15
-0,1
-0,05
0
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
France
United States
Figure 34: wage loss from unemployment, women
-0,45
-0,4
-0,35
-0,3
-0,25
-0,2
-0,15
-0,1
-0,05
0
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
France
United States
Policy aspects
• Important to reduce H for older workers
• But most of it is genuine
• Endgame effect is thus largely an efficient phenomenon
What would happen in a competitive market?
• Many elderly would stick to their current job, at the cost of lower wages
• Those who nevertheless lose it would endogenously retire or find a low paying, low hiring/training cost, job
• Somehow, European institutions emulate this outcome
However, this is probably inefficient
• Nothing guarantees that the right people are allocated to the two first outcomes
• The last outcome, low-paid job, is shut down
Policy proposals
• Reduce unemployment benefits
• Allow to cumulate pensions with jobs in actuarially fair way
• Or, more ambitiously, implement wage insurance scheme
• Deal with credit constraint with unemployment support account
How about the endgame effect?
• Analysis shows that employment rate of 55-60 should increase when retirement rate goes up
• Current employment rates are misleading (Lucas critique)
• But endgame effect cannot be eliminated, hence importance of a transitory semi-pensioned scheme
