Research & Policy Briefs From the World Bank Malaysia Hub No. 48 August 09, 2021 Does Elderly Employment Reduce Job Opportunities for Youth? Alyssa Farha Jasmin and Amanina Abdur Rahman The aging of populations around the world and the associated fall in the working age population are expected to adversely affect countries’ GDP growth in coming decades. These demographic shifts will also place fiscal pressure on governments, given the need either to finance pension systems or to support the most vulnerable in retirement. Extending working lives is imperative but often politically challenging, due to the widespread belief that extending employment for older workers will limit employment opportunities for youth. Global empirical evidence summarized in this Brief, as well as original analysis, does not support this belief, and in fact suggests that elderly employment has positive effects on youth employment, on the well-being of older workers, and on economies and societies. There is much to gain in creating a supportive regulatory environment to harness the economic potential of older workers by eliminating age-biased hiring practices, allowing for flexible working conditions, and providing equal opportunities for upskilling and reskilling. Aging and its Impacts on Economies on family members to finance the needs of elderly. Aged care and health care costs are also expected to rise as the In only two decades, the global average life expectancy at population ages, further straining governments’ budgets. birth has increased by 7.7 years—and it is projected to continue rising (UN 2019). The pace of aging varies To improve the sustainability of pension systems, many significantly across countries; while the aging transition has member countries of the Organisation for Economic occurred over at least a century for developed countries, Co-operation and Development (OECD) have introduced developing countries, especially in Asia, are aging at an policies to extend working lives. This includes increasing exceptional speed. The share of elderly people will more than statutory retirement ages, as well as undertaking reforms to triple between 2000 and 2050 throughout the region, while boost labor demand for older workers (OECD 2019). However, the old-age dependency ratio—that is, the number of despite the economic need, the process of undertaking persons aged 65 years or above relative to number of persons reform to increase elderly employment has not been smooth aged 20 to 64 years—is projected to more than double in East and is often met by resistance by the public and policy makers and Southeast Asia (UN 2019). This demographic trend is alike. Among the main reasons for such resistance are the expected to have adverse impacts on the macroeconomy. assumptions that there is a fixed number of jobs in an Labor force participation rates globally are expected to fall as economy (commonly referred to as the “lump of labor more people enter retirement relative to people entering the fallacy”), and that older and younger workers are substitutes. labor market, resulting in lower levels of GDP growth (Otsu Accordingly, elderly employment is thought to limit the and Shibayama 2016; Guillemette and Turner 2018). employment opportunities available for youth (see Gruber, Milligan, and Wise 2010). Interestingly, these notions persist, Important policy parameters have not kept up with the despite evidence showing otherwise. pace of increased longevity to ensure the older population has sufficient income to last their lifetimes. A study of 43 The Relationship between Elderly Employment and countries (Bloom et al. 2011) finds that male life expectancy Youth Employment increased an average of nearly nine years between 1965 and 2005; for the same period, the mean legal retirement age Various attempts to improve youth employment by reducing rose by less than half a year. Increased divergence between elderly employment have been unsuccessful. For instance, policy parameters and life expectancy is also expected to be the United Kingdom government introduced the Job especially worse for countries that are aging more rapidly. As Release Scheme in 1977 to encourage older workers a result, old-age support systems will be challenged. In to retire early in order to release jobs for the registered countries with defined benefit systems, generous benefits unemployed—specifically, youth. The scheme successfully coupled with a constant receipt of tax revenues will create reduced employment of the elderly but did not have a fiscal pressure on governments. The challenge will be positive effect on youth employment (Banks et al. 2010). balancing the adequacy of pension benefits with the Similarly, the French government actually lowered the sustainability of pension systems. In contrast, in countries retirement age from 65 to 60, along with other reforms to with defined contribution schemes, low contributions and encourage older workers to leave the labor force. The reforms early withdrawals are major risks. Where informality is high, were successful in their objective to induce older workers to coverage of these schemes could also exclude the most leave, but no evidence was found to support the view that the vulnerable—particularly women and those with low incomes reforms provided more job opportunities for the young —as they tend to be informal workers. Thus, the burden falls (Gruber, Milligan, and Wise 2010). Affiliations: Alyssa Farha Jasmin and Amanina Abdur Rahman, Social Protection and Jobs Global Practice, World Bank. Acknowledgements: The authors thank Yashodhan Ghorpade, Tobias Pfutze and Kenneth Simler for useful comments and suggestions. Objective and disclaimer: Research & Policy Briefs synthesize existing research and data to shed light on a useful and interesting question for policy debate. Research & Policy Briefs carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions are entirely those of the authors. They do not necessarily represent the views of the World Bank Group, its Executive Directors, or the governments they represent. Does Elderly Employment Reduce Job Opportunities for Youth? Figure 1. Employment Rate of Youth and Employment Rate of Elderly across Countries Employment rates of older workers and younger workers in OECD and ASEAN countries tend to be positively linked 90 Iceland 80 Sweden Japan New Zealand Employment rate, workers aged 55–64 (%) Norway Switzerland Latvia Estonia Denmark 70 Korea Lithuania Germany Netherlands Israel Chile Czech Republic Indonesia Finland United Kingdom Ireland Australia Slovak Republic C olombia Canada 60 Portugal United States Costa Rica Hungary Mexico Italy Spain France Austria 50 Belgium Poland Slovenia Brazil Russian Federation Greece Luxembourg 40 South Africa Turkey 30 0 10 20 30 40 50 60 70 80 Employment rate, workers aged 15–24 (%) Source: Authors’ illustration based on data from ILOSTAT and OECD Stats. Note: ASEAN = Association of Southeast Asian Nations; OECD = Organisation for Economic Co-operation and Development. Indeed, while intuitively appealing, there is no solid economy, creating higher aggregate demand for labor, evidence to back the view that increased employment among including that supplied by younger workers (World Bank older workers adversely affects the employment prospects of 2016). Studies have also shown that older and younger younger workers (see World Bank 2016 and Box 1, which workers have different skillsets and are therefore presents the results of an analysis for this Brief of the labor complements rather than substitutes. For example, empirical market in Malaysia). In fact, findings from the literature have evidence shows that workers who differ by as little as five generally pointed that the relationship between elderly and years in age are found to be imperfect substitutes in Germany youth employment is either nonexistent or contradicts the (Fitzenberger and Kohn 2006). A study of 22 OECD countries crowding-out theory. An international analysis of 12 OECD has found that older workers and younger workers tend to be countries highlights that the relationship between elderly and complements rather than substitutes (Kalwij, Kapteyn and De youth employment is actually slightly positive, and that the Vos 2010), as older workers may have skills such as life relationship between elderly and youth unemployment is experience and job-specific knowledge that generally differ slightly negative (Gruber, Milligan, and Wise 2010). Similar from those of younger people who have yet to experience a findings have been found in a more recent study analyzing the long working life. relationship in OECD countries (Böheim and Nice 2019), as well as in studies analyzing the relationship in East Asia (see In contrast to evidence at the national level, policies Oshio, Shimizutani, and Oishi 2010 for Japan; and Munnell increasing the retirement age has been found to adversely and Wu 2013 for China). Countries that employ more older affect youth employment at the firm level. In Italy, a persons also tend to employ more youth, as seen in Figure 1, mandatory increase in retirement age in 2011 resulted in the which illustrates the positive relationship between elderly reduction in youth hiring among private firms (Boeri, and youth employment seen in OECD and Association of Garibaldi, and Moen 2016). Similarly, in Portugal an increase Southeast Asian Nations (ASEAN) countries. in the legal retirement age for women from 62 to 65 years in 1993 resulted in a reduction in hiring of younger women (the There are a number of possible reasons for the positive legal retirement age was unchanged for men) (Martins, Novo, relationship between elderly and youth employment. The and Portugal 2009). Nonetheless, while there is limited labor market participation of older workers can stimulate the evidence that a higher retirement age could cause firms to 2 Research & Policy Brief No.48 delay the hiring of younger workers in the short term, physical and mental health on workers (Joyce et al. 2010). longer-term and aggregate findings still suggest that there is no real evidence of older workers crowding out jobs for the Governments have a key role to play to create awareness young. about the importance of elderly employment and facilitate practices by firms to encourage it. While employers may have negative perceptions of older workers' capabilities and Policies to Support Elderly Employment productivity, a recent OECD report finds that the productivity With labor shortages anticipated in the future, retaining and of older workers is similar to that of prime-age workers (OECD encouraging the participation of older workers in the labor 2020). Moreover, in the face of age discrimination, it is market is imperative. However, older workers often face important to eliminate age-biased hiring practices and discrimination in the labor market, and poor working promote age diversity, as greater age diversity enables conditions may push them into early retirement. Thus, workers of different ages to collaborate and share knowledge. extending the retirement age will not be enough—there must Wage subsidies can also boost reemployment of older be real employment prospects for older workers for them to workers and are particularly effective when targeted to remain working. Countries aiming to increase the low-wage earners and the long-time unemployed (OECD employment rates of the elderly can learn from OECD 2020). countries, where the labor force participation rate of 55- to Lastly, providing equal opportunities for older workers to 64-year-olds has risen by nearly eight percentage points on upgrade their skills throughout their lives is crucial in average from 2009 to 2018 (OECD 2019). Among these strengthening their employability. For example, the practices are improving the incentives to work at older ages government of Canada introduced a Targeted Initiative for (and removing the incentives to retire early), boosting Older Workers (TIOW) program that helps unemployed employer demand for older workers, and improving the workers, typically aged 55 to 64, reintegrate into employability of older persons. employment. It provides employment assistance services Long working hours and physically demanding jobs may such as interviewing techniques and activities such as skills discourage older workers from working and result in workers upgrading and community-based work experience. An going from working full time to not working at all. One of the evaluation of the program found that it has been relatively main incentives to extend working lives is introducing flexible successful in helping older workers find employment or work arrangements (particularly reduced work hours) and become self-employed (Government of Canada 2017). offering part-time positions to give older workers greater Furthermore, in some countries such as Australia, Germany, choice and facilitate their phased transition to retirement and the Netherlands, initiatives to reduce the cost of training (see the UK government survey of older workers in of older workers relative to other workers have been Department for Business, Energy & Industrial Strategy 2018 ). introduced to encourage employers to invest in training for Flexible working arrangements are also found to improve the older employees (OECD 2019). Box 1. The Relationship between Elderly and Youth characteristics at the state level (share of those with low Employment in Malaysia education). The analysis also included a set of state controls and year dummy variables. The analysis was conducted using To analyze the relationship between elderly and youth nationally representative survey data from 145 districts from employment in Malaysia, this Brief adopted a regression 13 states and 2 federal territories nationwide from 2014 to model based on Munnell and Wu (2013). Specifically, the 2016. The federal territories of Kuala Lumpur and Putrajaya model looks at how variables such as the employment rate of were considered to be one federal territory due to the the young (20 to 24 years old) and the prime-aged (25 to 54 relatively small population in Putrajaya. years old), and the employment income of the young and the Preliminary evidence shows that the relationship between prime-aged could be influenced by the employment rate of the employment of older workers and younger workers is the old (55 to 64 years old). The employment rate for each either positively linked or nonexistent. The analysis finds that group is defined as the ratio of employed persons to the total the relationships between the employment of older workers population in each age group. All variables are measured at and youth, as well as employment of older workers and the district level. Other covariates include other factors at the prime-aged workers, are positive and statistically significant state level that vary over time that could influence for the overall sample and female-only sample, while they are employment rates of younger workers, such as state-specific positive and not statistically significant for the male-only economic conditions (GDP per capita, GDP growth, poverty sample. All in all, these results suggest that the employment rates); the state-specific nature of employment (the share of of older workers is associated with higher levels of those employment in the manufacturing and services sectors employment among younger workers, or has no association as well as the share of the self-employed); and demographic at all. 3 Does Elderly Employment Reduce Job Opportunities for Youth? However, there is a statistically significant and negative relationships for women were found to be positive for the relationship between the employment rate of older persons former and insignificant for the latter. In contrast, for workers and income of youth overall, and young men specifically. with post-secondary education, the employment rate of the Nonetheless, the magnitude of this relationship is small: a elderly is associated with a statistically significant positive one percentage increase in the employment rate of older increase in the employment rate of the prime aged, while it is workers is associated with a 1.2 and 1.7 percentage decrease positive and insignificant for the young. in the employment income of the overall sample and young men, respectively. Overall, preliminary evidence for Malaysia suggests that there is generally no significant relationship between Among those with a primary education, a negative employment of the elderly and youth, although more relationship is also found between older men and prime-aged rigorous analysis would be required to obtain robust results. men, while the relationship between older men and young That said, this evidence, combined with that from other men is insignificant. This could be explained by the fact that countries, suggests that supporting elderly employment is those with primary education are more readily substitutable unlikely to have an adverse effect on the employment of because of the similarities in the skills they provide. The same younger persons. Conclusion age-discriminating practices in firms; subsidizing wages of older workers; and providing opportunities for upskilling and Population aging is one of the most significant demographic reskilling of older workers are a few policies that governments trends occurring around the world. Important policy should consider moving forward. To reduce the political parameters to ensure the sustainability and adequacy of economy challenges related to the retirement or pension age, incomes for the older population, such as raising the a number of OECD countries have also made provisions to minimum retirement age, have not kept up with this trend. automatically link the normal retirement age to life One of the main arguments used to reject such policy expectancy (see OECD 2019). changes is the belief that extending working lives would reduce job opportunities for the young. As this Brief has Not only would extending the work lives of older people shown, the employment of older workers and younger benefit workers’ well-being (see Nikolova and Graham 2014), workers tend to move in tandem, rather than in conflict, with but families, societies, and the economy can benefit too. For each other. example, a study of the United Kingdom shows that a one-year increase in working life is estimated to boost the Low employment rates of the elderly, coupled with a level of real GDP by more than 1 percent after six years shrinking labor force, make it imperative to retain and hire (Barell, Kirby, and Orazgani 2011). Other benefits would older workers. In parallel to raising the minimum retirement include an increase in tax receipts, lower government age, other policies are needed to foster the productive and spending on health and aged care as people remain inclusive employment of older workers. 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