The argument that older people should leave the paid labour force to make way for younger workers is a hardy perennial in the news media and general comment. A good example was an article by Simon Collins in the Herald (Feb 17, 2012) with the headline Over-65s crowd teens out of market. This claimed that “Old people have displaced more than 40,000 teenagers from jobs in the past five years as more choose to stay on in the workforce and employers shun youth for experience.”
The main evidence produced for this assertion was research by the Salvation Army’s social policy unit, which “found that the number of 15 to 19-year-olds in paid work dropped by 42,600 in the last five years, while the numbers still working beyond 65 jumped by 40,200.” The conclusion was that employers were holding on to experienced workers past the traditional retirement age, at the expense of taking on inexperienced young people.
This kind of argument was used to support early retirement policies in Europe and elsewhere, in the belief that this would lead to a reduction in unemployment. It has now been realised that this approach was unsustainable and the trend in most developed countries is now towards postponement of the retirement age.
It all arose from the “lump of labour” theory, which assumed that the amount of work available is fixed and static – it is a zero-sum game –and that the job market worked on a one-in, one-out basis. The same theory has been used to argue that immigration and the employment of women also causes unemployment. But most economists now accept that the “lump of labour” theory is a fallacy.
A book recently published by the US National Bureau of Economic Research collated academic papers from different countries, investigating whether older workers substitute or crowd out younger workers. Not a shred of evidence was found. The Institute for Fiscal Studies in the UK agreed with this conclusion. Almost coincidentally with the Simon Collins article was an editorial in The Economist, under the headline Why the old should not make way for the young (Feb 11th 2012). The latter presents data showing that labour force participation of the old is positively associated with employment of the young.
Why? The way to produce a prosperous and growing economy is to keep as much of the population as possible economically active. When more people are in work, people have more money to spend, and this creates more jobs. If all older people left the workforce, the loss of their spending power would wreck the economy and unemployment among all age groups would shoot up. Society cannot become more prosperous by paying an increasing number of its citizens to become dependent and unproductive.
A 2012 British paper Active Ageing: Live Longer and Prosper, claims that, if people work into their sixties and seventies, the additional spending by older people could boost GDP by enough to cover the increased costs of aged care. If we are to deal with the consequences of an ageing population, that ageing population will have to keep working. They also need to work to fund longer periods of retirement and, for some, to recoup losses of savings in the global financial crisis. Given that people in their sixties are healthier and fitter than in previous generations, that is now possible. The same factors that make people live longer also enable them to work for longer.
The reasons for youth unemployment can therefore not be placed at the door of older workers. Other factors are operating, including economic conditions, policies on youth training and apprenticeships, the funding of tertiary education and youth wage rates.
In the short term, unemployment arises from economic fluctuations. In the longer term, demographic drivers will come into play. Natalie Jackson, director at the National Institute of Demographic and Economic Analysis says that New Zealand is becoming a “demographically tightening labour market”. There won’t be enough younger people to replace retiring baby boomers, because, two decades ago the birth rate fell and the numbers coming into the labour market are successively smaller each year. “It’s not just that we are lacking people of particular type of skills, but those people weren’t born.” If productivity growth does not compensate for the predicted slowdown in labour force growth then there will be adverse economic consequences, and an impact on the overall standard of living.
Stephenson and Scobie (2002) modelled the trends for the New Zealand economy. Projections indicate a slowing in labour force growth in the coming decades, due to population ageing and declining birth rates, especially as large numbers of baby boomers exit the workforce and smaller cohorts follow them through the population. Soon, based on present assumptions about participation, growth in the labour force is expected to be negative. Labour and skills shortages arising from similar demographic trends are emerging in many developed countries. In the USA labour shortages of 5-10 million workers are estimated within a decade. The National Strategy for an Ageing Australia argues that workforce participation in later life will be necessary to sustain economic growth “… as the supply of younger workers declines”. The OECD points out the same phenomenon in many member countries; in some, populations are already decreasing.
Can shortages be met by retaining experienced older people in the workforce? If so, what action is needed by government agencies? How can skills supply and demand be matched in an ageing workforce and how should issues of skills obsolescence and re-training be tackled?
As the population and the workforce continue to age, employers will become increasingly reliant on labour supplied by older workers. Many have not yet realised this. Continued belief in the “lump of labour” fallacy is not helping.