Job displacement and the transitions to re-employment and early retirement for non-employed older workers

Despite the relatively higher frequency of job displacement among older workers in Europe, little is known about its effect on the work-retirement decision. Employing individual data from the European Community Household Panel for a number of countries with differences in their institutional environments, the effect of job displacement for non-employed workers is identified separately for the transitions into re-employment and retirement. The findings suggest that in countries with relatively more generous unemployment insurance provisions for the older unemployed, which offer a pathway to early retirement, older displaced workers exhibit lower re-employment and higher retirement rates compared to the non-displaced. These results are robust to dynamic selection due to unobserved heterogeneity and to the endogeneity of displacement.     

Taxation of early retirement windows and delaying retirement: The French experience

This paper investigates the effect of the 2003 French pension reform on hiring, firing and employment rates among older workers. This reform increased the mandatory retirement age and simultaneously it set a tax levied on early retirement windows paid by firms to their older workers, to encourage them to leave their job early. We use a matching model with endogenous job destruction extended to account for a mandatory retirement age and we calibrate the model with data drawn from the French Labor Force Surveys for the years 2002 and 2003. We show that in the case of a high tax rate, delaying retirement raises job separation rates, which partially offsets its positive effect on job finding rates. Consequently, the combination of an increase in the retirement age and a taxation on early retirement windows may have negative effects on the employment rate among older workers.     

Gender difference in the impact of retirement on cognitive abilities: Evidence from urban China

This paper examines the impact of retirement on cognitive functioning by gender in urban China and investigates the underlying mechanisms. Based on data from the China Health and Retirement Longitudinal Study, the paper uses the mandatory retirement ages and different policy enforcement between the public and private sectors as instruments for retirement status. The analysis finds substantial gender heterogeneity in the effect of retirement on cognition, with a positive and significant effect for males, but a negative and less significant effect for females. The beneficial effects on cognition are stronger for male blue-collar workers, who are likely to pursue a more active lifestyle at retirement. Further investigation shows that the results are partly driven by differential behavioral changes at retirement, and the gender difference in retirement ages may also play a potential role.     

Old-age benefits and retirement decisions of rural elderly in Brazil

I estimate the impact of social security benefits on retirement decisions of rural workers by studying changes in the rules governing old-age benefits for rural workers in Brazil. I focus on a reform implemented in 1991, which reduced the minimum eligibility age, increased benefits, and extended the program to non-heads of households. Because those benefits come with no strings attached — they are not means or retirement tested — any behavioral response is a pure income effect. The main finding of the paper is that access to old-age benefits is a strong determinant of retirement of rural workers in Brazil: receiving old-age benefits increases the probability of not working by about thirty-eight percentage points and reduces total hours per week by 22½ h.     

Unemployment Durations in West Germany Before and After the Reform of the Unemployment Compensation System during the 1980s

Abstract. This paper analyzes empirically the distribution of unemployment durations in West Germany during the 1980s and 1990s. It therefore covers periods before and after the changes during the mid‐1980s in the maximum entitlement periods for unemployment benefits for older unemployed. The analysis is based on the IAB employment subsample containing administrative data for about 500,000 individuals. Since these data only partly reveal the unemployment duration in an economic sense, we use a narrow and a wide proxy for unemployment. Our empirical analysis finds significant changes in the distribution of non‐employment durations for older unemployed. At the same time, the distribution of unemployment durations between jobs remained unchanged after the reforms. Our findings clearly show that many firms and workers used the more beneficial laws as a part of early retirement packages. Surprisingly, for those workers who found and accepted a new job, we do not observe a prolongation of their search periods to a sizeable extent.     

Employer pay policies, public transfers and the retirement decisions of men and women in Denmark

The empirical retirement literature measures individual responses to variations in income flows due to public transfers, private individual or employer-provided pensions. We estimate a model accounting for the incentive effects from these sources. A dynamic structural model is extended to allow both individual and employer heterogeneity. This is applied to a Danish matched panel of workers and establishments, spanning a period of reforms to a public early retirement programme. Employer-specific compensation is found to be an important determinant of work and retirement income flows. Employer effects on retirement age are only found among sub-samples where access to public transfers is limited.     

The Effect of Benefit Reductions on the Retirement Age: The Heterogeneous Response of Manual and Non‐Manual Workers

I estimate the effect of benefit reductions on the timing of retirement. The introduction of actuarial adjustments in the German public pension system serves as a source of exogenous variation to estimate discrete time transition rates into retirement for individuals of age 60–66. Responses to benefit reductions are elaborated separately for manual and non‐manual workers. On average, individuals postpone retirement by 13.2 months if pension benefits are reduced by 3.6 percent for each year of early retirement. This result is in line with the previous quasi‐experimental literature and suggests that people respond to the incentive of reducing the implicit tax on further periods of work. However, among men the response is about 50 percent lower for manual workers compared to non‐manual workers. Surprisingly, this does not necessarily indicate that retirement incomes of manual workers deteriorate. The explanation is that disability pensions are available at age 63—without benefit reductions.     

Financial incentives and retirement: evidence from federal civil service workers

We examine the retirement behavior of federal civil service workers employed by the Department of Defense. These workers provide an interesting population for studying retirement because they face relatively simple financial incentives, high quality administrative data are available, and they are not covered by the Social Security system. We find that these workers respond to their financial incentives in a similar manner to what others have found when analyzing much different retirement systems. We also find no evidence of “excess retirement” at key ages of the Social Security system, which does not support the existence of societal-wide norms regarding retirement.     

Pension profile preferences: the influence of trust and expected expenses

This paper studies the influence of people’s expectations about expenses during retirement and trust in pension funds on preferences for different pension arrangements. Although most workers prefer a flat-rate annuity, many workers want to deviate from it. The most popular option is a high/low, annuity-based profile, followed by a partial lump sum payment. Workers who expect declining expenses during retirement are more likely to opt for a high/low annuity-based pension and/or a lump sum payment at retirement. Furthermore, workers and pensioners who do not trust their pension fund are more likely to prefer a lump sum over annuity-based arrangements.     

Labor market shocks and retirement: Do government programs matter?

This paper argues that labor market conditions are an important and often overlooked determinant of retirement transitions. In our analysis, we examine how the unemployment rate affects retirement and whether the Social Security (SS) system and Unemployment Insurance (UI) system influence how older workers respond to labor market shocks. We use pooled cross-sectional data from the March Current Population Survey (CPS) in our analysis. We find that downturns in the labor market increase retirement transitions and that the magnitude of this effect is comparable to that associated with moderate changes in financial incentives to retire and to the threat of a health shock facing older workers. Interestingly, retirements only increase in response to an economic downturn once workers become SS-eligible, suggesting that retirement benefits may help to alleviate the income loss associated with a weak labor market. We also estimate the impact of UI generosity on retirement and find little consistent evidence of an effect. This suggests that in some ways SS may serve as a more effective form of unemployment insurance for older workers than UI.     

Hiring Older Employees: Do the Age Limits of Early Retirement and the Contribution Rates of Firms Matter?

We examine the effects of a Finnish pension reform on firms' incentives to hire older employees. The reform restricted the eligibility ages for early retirement and changed the size‐related contribution rates of firms. According to our theoretical model, the positive effect on the values of new hires extends to age groups younger than those directly affected by the reform, and the effects are strongest in the largest firms. These model predictions were confirmed in a difference‐in‐difference‐in‐differences analysis on the probability of the hiring of workers of different ages in firms of different sizes.     

Social Interaction Effects in Disability Pension Participation: Evidence from Plant Downsizing*

We estimate the magnitude of social interaction effects in disability pension participation among older workers in Norway. The problem of omitted variable bias is addressed using the exposure of an individual's neighbors to plant‐downsizing events as an instrument for the disability entry rate among the individual's previously employed neighbors. Our instrumental variable (IV) estimates suggest that an increase of one percentage point in the participation rate of previously employed neighbors increased the subsequent four‐year entry rate of older workers by about 0.4 percentage points. Numerous robustness and specification tests appear to support the validity of the identifying assumption in our IV strategy.     

Public pension programmes and the retirement of married couples in Denmark

In this paper we study the economic determinants of the joint retirement process of married couples. We propose a tractable dynamic discrete choice model for retirement decisions which allows for non-trivial saving behaviour. We estimate the model on a 1% sample of Danish couples of potential retirement age drawn from a population-based administrative register. The introduction and subsequent reforms of a publicly financed early retirement programme provide us with variation in the data to insure identification of the parameters of interest: the elasticities of participation/retirement with respect to income flows. Our estimates imply a significant asymmetry in the sensitivity of retirement behaviour of men and women with respect to variation in their own, or their spouse's, income flows.     

A NOTE ON “A ONE‐SECTOR NEOCLASSICAL GROWTH MODEL WITH ENDOGENOUS RETIREMENT”: EXISTENCE OF MULTIPLE STEADY STATES*

This note extends Matsuyama's 0–1 endogenous retirement choice model to the framework with continuous endogenous retirement choice to study the consumption‐saving decision and capital accumulation in an overlapping generation model. The conditions for the existence of multiple steady states have been derived. In contrast to the 0 or 1 labour choice, the partial retirement may be a stable steady state under the continuous endogenous retirement choice in the second period. And this implies that partial retirement may be a stable optimal choice. Also, we find that the retirement choice depends on the initial capital stock when there are multiple steady states.     

The impact of China's millennium labour restructuring program on firm performance and employee earnings1

Around the turn of the century, China experienced perhaps the largest labour restructuring program in the world. This paper uses a new dataset of Chinese industrial enterprises to examine what leads to downsizing, and tries to understand the effects of labour downsizing on firms’ technical efficiency, financial performance and employee wages. We find that downsizing is more prevalent in state‐owned enterprises (SOEs), and is more likely when enterprises are older, larger and have higher excess capacity. For both SOEs and private firms, downsizing is more likely when the prices of their products drop, but private firms respond more dramatically. Moreover, downsizing has serious short‐term costs in terms of total factor productivity (TFP). For mild downsizing, private firms suffer more deterioration in productivity. The distribution of surplus after downsizing is more favourable to labour in SOEs. For severe downsizing, both SOEs and private firms exhibit lower TFP growth with similar magnitudes. Our findings imply that private firms emphasize profit goals, while SOEs place a greater weight on labour protection.     

Equilibrium unemployment and retirement

We first propose some new empirical evidence on the fact that the labor market conditions matter for the retirement decision at the individual level: we investigate whether unemployed workers retire before employed workers, other things being equal. Our main objective in this paper is then to propose an equilibrium unemployment approach to retirement decisions that allows us to derive the positive and normative features of retirement decisions when search and matching frictions are considered. Two main conclusions emerge: the retirement decision of unemployed workers depends on the labor-market frictions whereas that of employed workers does not; the existence of search externalities makes the retirement age of unemployed workers intrinsically suboptimal. Considering Social Security policy issues, we show that the complete elimination of the implicit tax on continued activity is not necessarily welfare-optimizing in a second best world where the labor market equilibrium suffers from distortions.     

Worker turnover at the firm level and crowding out of lower educated workers

This paper investigates whether employers exploit cyclical downturns to improve the average skill level of their work force. We use a unique dataset that contains information on workers, jobs as well as firm characteristics. Our findings are that at each job level mainly lower educated workers leave during downturns. Furthermore, at each level of job complexity, workers with a higher education are not more productive than lower educated workers. We find no evidence that higher educated workers crowd out lower educated workers during recessions.     

Social insurance for the elderly

We study the effects of retirement benefits provided by social insurance programs on consumption, portfolio choice, and retirement in a continuous-time theoretical model. We show that people tend to retire earlier with an increase in retirement social insurance benefits (SIBs), consistent with empirical evidence. We show also that people tend to increase savings before retirement in anticipation of increased retirement benefits, a counter-intuitive result. The response of risky investment with an increase in the SIBs is ambiguous, depending on parameter values. The overall social welfare will increase with an increase in SIBs if the balanced budget constraint is satisfied. We also investigate the effects of changes in the two streams of the SIBs (paid in perishable goods and cash) and the proportion of workers in entire population on social welfare.     

A theory of reverse retirement

The retirement system is usually regarded as giving a fair reward for a long working career. However, only workers who have a sufficiently long life benefit from that reward, but not workers who die prematurely. To re‐examine the fairness of retirement systems under unequal lifetime, this paper compares standard retirement (i.e., individuals work before being retired) with—hypothetical—reverse retirement (i.e., individuals are retired before working). We show that, under standard assumptions, an economy with reverse retirement, once in place, converges towards a unique stationary equilibrium. At the normative level, we show that, when labor productivity declines with age, reverse retirement cannot be optimal under the utilitarian criterion (unlike standard retirement), whereas reverse retirement can be optimal under the ex post egalitarian criterion (giving priority to the worst‐off in realized terms). Finally, we show that there exists a set of policy instruments that allow a government to organize a successful transition from standard to reverse retirement.     

Labor Market Information Acquisition and Downsizing

We study the optimal mechanism for downsizing the public sector which takes into account different informational constraints (complete versus asymmetric information on each worker’s efficiency) and political constraints (mandatory versus voluntary downsizing). Under complete information, the optimal structure of downsizing (who is laid‐off and who is not) does not depend on the political constraint and is determined by the (marginal) cost of retaining a worker in the public sector. Since this cost includes his opportunity cost in the private sector, information acquisition on opportunity costs affects the structure of downsizing. Under asymmetric information, the political constraints determine which workers obtain information rents and therefore affect the structure of downsizing. An increase in the precision of the information on workers’ opportunity costs may increase or decrease social welfare depending on its impacts on the information rents.