The Older Worker in the Labor Market: Work Time and Work Incentives

Organizers:Daniel S. Hamermesh (University of Texas at Austin and IZA Bonn), Ana Rute Cardoso (IZA Bonn)
Place:D. Maria I Pousada, Queluz, Lisbon, Portugal
Date:May 16-17, 2005

We wish to thank the Bank of Portugal, Foundation Calouste Gulbenkian, Portuguese Employment Office (IEFP) and the Luso-American Foundation for financial support, and the Economic Policies Research Unit at the University of Minho for collaboration in the local organization.


The IZA Research Program "The Future of Labor" held an international workshop in Queluz, Lisbon, Portugal, to discuss a series of invited papers dealing with the position of older workers, with a special focus on retirement and labor-force participation issues. The workshop was organized by Ana Rute Cardoso and Daniel Hamermesh. In light of the growing share of older citizens in Europe and the U.S. -- older workers are the future of the demographic structure in Europe -- these issues seemed especially relevant for this Program. The papers represented work by authors from seven different countries, and discussants participated representing several other countries.

Richard Disney of the University of Nottingham presented an optimizing model of saving and labor-force participation that paid careful attention to the structure of social security/old age tax and benefit programs in 22 countries over 3 time periods. The estimated effects of the social insurance programs allow for differences due to country-specific factors, so the author was able to focus on within-country changes in the structure of a program. The results make it quite clear that the changes in the programs affected women's labor-force behavior in expected ways, but had no impact on men’s behavior. In countries where programs were changed to represent private pension schemes, the effects on total household savings rates were found to be negative.

Axel Börsch-Supan of the University of Mannheim inquires into the extent to which the drop in the economically active population (due to the aging of the population) will affect the rate of growth of per-capita GDP. Using the example of Germany, he finds that increased accumulation of capital and increased immigration are unlikely to be sufficient to compensate for the declines in productivity associated with the aging of the work force. The only apparent solutions are improvements in the rate of human capital accumulation among the remaining (fewer) workers.

Sergi Jiménez-Martín of Universitat Pompeu Fabra presented an optimizing model that is calibrated over data covering the Spanish labor market. The focus is on an instituted required minimum public pension level, which is found to raise the rate of labor-force exit before age 65 from 60 percent to 75 percent.

John Rust of the University of Maryland examines how one might design efficient social insurance programs. The particular focus is on the recent plans for partial privatization of the American public retirement program. Ignoring issues of how to move from an unfunded public program to a partially funded mixed program, he finds that the mixed program would increase social welfare under reasonable assumptions about rates of return on the assets in which the program would invest as compared to an unfunded public program.

James Banks of University College London examines recent new English data on health and retirement. While many researchers have examined the role of changes in health in moving people out of the workforce, almost all have focused on self-assessed health. The research question is whether self-assessments provide enough information to gauge the effect of health on labor-market activity. With data on both self-assessed health and objective measures of health (blood pressure, blood markers, etc.), he finds that self-assessments encompass most of the relevant information that is useful in predicting whether older people continue working.

Michael Hurd of RAND Corporation studies the impact of unexpected changes in wealth on people’s expectations of when they will retire. The particular example is the large increase and subsequent large decrease in the value of older workers’ holdings of shares in the U.S. in the late 1990s and early 2000s. The evidence makes it clear that the growth in wealth in the late 1990s did nothing to induce earlier retirement, while the subsequent stock market bust did slightly extend people’s expected working lives, perhaps by ½ year.

Agar Brugiavini of the University of Venice looks at gender differences in the responses to variations in the generosity of public pensions. While we generally expect women to be more responsive to changes in work incentives, she shows that the retirement behavior of Italian men responded more to changed incentives than did women. This surprising result is attributed to older women’s facing greater constraints on their labor-supply behavior.

Ana Llena-Nozal of the Free University of Amsterdam estimates a complex model of the impact of disabilities on work activity using British data. The novelty is the availability of huge amounts of information on the individual early in life. The author shows that parental background, and early childhood treatment and behavior have substantial effects on the incidence of accidents during young adulthood, and that accidents greatly reduce the likelihood of working in the labor market.

Daniel Hamermesh of the University of Texas at Austin examines how working in the market alters the mix of activities undertaken at home. Using a large time-budget study of the United States, he finds that work substitutes mainly for pure leisure activities, and much less so for household production and personal maintenance. The study also suggests that the rigidities of work schedules alter the amounts of different activities undertaken at home, again to the special detriment of leisure.

John Abowd of Cornell University applies the data from a massive project integrating American data sets on firms and individuals to study how employers combine technology and workers’ characteristics. A particular focus on the demand for older workers indicates that they are relatively complementary with technology, although they are less likely to be utilized where the firm has an unusually high ratio of computer software to hardware.

Using American data, Frederic Vermeulen examines the behavior of elderly couples to focus on the jointness of work and leisure. He shows that couples react together to health and other shocks experienced by one spouse. The model is also used to show that retirement responds only very slightly to changes in eligibility rules for retirement benefits.

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