Between December 2007 and May 2010, the employment rate dropped by 6 percent for men ages 25-54, but less than 1 percent for workers age 55 and older. The pattern for women was equally dramatic: the employment rate dropped by 3 percent for younger women and actually increased by almost 1 percent for older women (U.S. Bureau of Labor Statistics, 2007-2010). These strikingly divergent patterns between the old and the young in labor-force behavior generated widespread media claims that delayed retirement by the baby boomers causes higher unemployment among the young.
The proposition that more work by older persons reduces the job opportunities for
younger persons is known as the “lump of labor theory” write Alicia H. Munnell and April Yanyuan Wu in WILL DELAYED RETIREMENT BY THE BABY BOOMERS LEAD TO HIGHER UNEMPLOYMENT AMONG YOUNGER WORKERS? (Chosen excerpts by JMM to follow)
This notion is widely accepted in many European countries and has provided an economic rationale for early retirement programs. In the United States, economists generally reject the lump of labor theory, arguing that the labor market is dynamic and the economy can adapt to labor force changes. Nevertheless, the increased media attention and its potential influence on public policy calls for an empirical analysis.
Using 1977-2011 data from the Current Population Survey, this paper investigates the often-repeated claim that delayed retirement by baby boomers will result in higher unemployment among the young, a claim which has been garnering increased attention from the media during the Great Recession. It explores both time-series and cross-state variation, and uses state-level regressions and instrumental-variable models to determine the extent to which such “crowding out” exists in the United States.
The estimates show no evidence that increasing the employment of older persons reduces the job opportunities or wage rates of younger persons. Indeed, the evidence suggests that greater employment of older persons leads to better outcomes for the young in the form of reduced unemployment, increased employment, and a higher wage.
The patterns are consistent for both men and women and for groups with different levels of education. Estimates using elderly male mortality rates as instrumental variables also produce no consistent evidence that changes in the employment rates of older workers adversely affect the employment and wage rate of their younger counterparts. If anything, the opposite is true.
Finally, despite the fact that the labor market downturn that accompanied the Great Recession was the most severe experienced in the post-war era, the effects of elderly employment on other segments of the labor market do not differ from those during typical business cycles.