One solution to fiscal imbalances in social security systems is to encourage workers to delay retirement, by either increasing minimum retirement ages, or reducing pension incentives to early retirement. A potential concern is the impact on youth unemployment, with some arguing that the number of jobs available in the economy is fixed, so that increases in labor force participation rates among the old must, of necessity, reduce participation rates among the young. I conducted an admittedly unscientific poll of my colleagues at the Center for Retirement Research, who all unhesitatingly dismissed such concerns as groundless. On the other hand, belief in the ‘lump of labor’ fallacy appears to be alive and well among non-economists.
Notwithstanding my colleagues' confidence that increases in labor force participation at older ages would not materially increase unemployment among the young, there is a surprising lack of rigorous academic research on the subject. This excellent book fills this gap. It contains a series of country studies, with each study carried out in a standard format. Although the conclusion of the research – that there is no offset – will surprise few economists, they provide useful ammunition to rebut the plausible but fallacious arguments of many non-economists.
The question considered by the book would, at first sight, seem straightforward. Surely, all one has to do is estimate an econometric model with youth unemployment as the dependent variable, and the labor force participation rate of older workers as the explanatory variable. An obvious problem is that the labor force participation rates of both young and old vary with the business cycle, so that in the absence of appropriate control variables, a high rate of labor force participation among the elderly will appear to ‘cause’ a low level of youth unemployment. One potential solution is to control for the level of economic activity, for example by adding the level and rate of growth of per capita GDP to the model. But concerns remain that models of this type may yield biased estimates of the displacement effect.
What one would ideally want is some exogenous variation in the rate of labor force participation of the elderly. Previous research has shown that social security systems often contain powerful incentives that lead workers to retire at particular ages. Changes in these incentives might provide just such a source of exogenous variation. Two difficulties arise. First, in many countries, reforms to social security systems of sufficient magnitude to significantly change retirement incentives have been relatively infrequent. Second, reforms may be associated with labor market shocks that themselves may affect the labor force participation rate of the young.
The contributors present results using all of the above approaches. A particular strength of the book is that the contributing authors each have an in-depth understanding of their assigned country's social security system, permitting a thorough investigation of the ways in which social security retirement incentives have changed over time. Without exception, they find no evidence of displacement, whether in English speaking countries characterized by relatively flexible labor markets, or in the countries of continental Europe that are typically thought of as having more regulated labor markets. This is true even in France, where policies designed to reduce labor force participation rates of the elderly were introduced with the explicit goal of reducing youth unemployment.
A minor criticism is that the authors could have done more to set the changes in labor force participation rates at older ages in context. In many countries, there has been a dramatic increase in female labor force participation during the post-war period. In some countries, there have been equally dramatic decreases in the proportion of workers employed in agriculture. These changes appeared to have little effect on the employment opportunities available to the young. It would be interesting to know whether these shocks to labor supply were large relative to the shocks resulting from the changes in the labor force participation rate of the elderly.
So why do the young in many European countries oppose increases in the retirement age? Do they truly believe that increased labor force participation by older workers will reduce their chances of getting a job? Or are they motivated by solidarity with their elders, or a desire to preserve the existing retirement age for when they eventually retire. I suspect that prominent among their concerns may be a belief that increases in the age of retirement will block their opportunities for advancement – that they will be left waiting for dead men's shoes. This seems to me to be a more legitimate concern. For example, in the academic world, the recruitment of new tenure-track professors is contingent on the retirement of older faculty members.
