KEEP ON TRUCKING / THE ECONOMIST ( A MUST READ )

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Keep on trucking


Why the old should not make way for the young


Feb 11th 2012

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WORK until you drop. That is how many people characterise the argument of those—this newspaper included—who call for a later retirement age. Life expectancy may be steadily increasing but few are eager to add to their years of toil. Indeed, the French Socialist Party wants to reverse a recent rise in the retirement age from 60 to 62.



In part, this resistance to working longer is because people tend to feel they are entitled to put their feet up after a career of 35-40 years. But it is also because many reckon old people should get out of the way so that the young can take their jobs, a sentiment expressed recently by Lucy Kellaway, a Financial Times columnist, who wrote that “the young can’t advance because everywhere they find my complacent generation is in situ.”

Economists will recognise the flaw in this logic. This view is based on the “lump of labour” fallacy that states there is only so much work to go around. The same argument was used to discourage women from joining the workforce; and the threat to domestic jobs is still used by anti-immigrant politicians today.

The problem with the lump-of-labour fallacy is that it is so hard to kill. It appears to be common sense. Most people know an older manager (or columnist) who refuses to make way for a younger, more energetic rival.



In the face of intuition and anecdotal evidence, it is always good to look at the data. The chart shows employment levels in the mostly rich OECD countries among the oldest section of the workforce (55-64) and the youngest (15-24). The countries are divided into four quartiles, and ranked in order of the employment rate of the grey-haired contingent.



If the lump-of-labour argument were correct, you would expect to see that a high employment rate among the wrinklies would be offset by a low employment rate among the youngsters, and vice versa. Not a bit of it. High elderly employment rates are associated with high youth employment.



One possible counter-argument is that this correlation may simply show that different economies are at different stages of the cycle: when an economy is growing strongly, employment rates for both the old and the young are likely to be high. But that is a hard point to sustain, given that the past few years have seen a worldwide recession and modest recovery. Most of the economies that have been growing bouncily (such as China) are not in the OECD.



So why don’t the oldies keep the youngsters out of jobs? For the same reason that women don’t keep men out of jobs. When people work for a living, they earn money. They spend that money on goods and services that are produced by other people, young and old, male and female.



Job patterns change, too. Once nearly everybody worked on the farm. But the advent of tractors and combine harvesters did not lead to permanent unemployment. People found jobs, first in manufacturing and then in services. The elderly may not be doing the same jobs in their 60s as they were in their 30s.



Perhaps none of the above arguments (or data) convinces you. So consider a thought experiment. If old people leave the workforce early, they become dependent on young people for their living. This is obviously the case with those on state benefits. But it is also true for those with private pension funds: these consist of equities and bonds which depend on workers to generate the income needed to pay dividends and interest.



Indeed, one reason that corporate-pension funds are in deficit is that they have been raided on so many occasions to fund early-retirement programmes. This was a classic case of a false economy. The wage bill went down in the short term but the pension costs went up in the long term. Companies assumed they could make good on these long-term promises because they hoped future investment returns on their pension funds would be as good as they were in the 1980s and 1990s.



What is true at the corporate level is also true in aggregate. People assume they can afford long retirements because economic growth will continue. But growth depends on having either more workers or greater productivity. A society cannot really be more prosperous if it pays more and more of its citizens not to work.



If early retirement really improves living standards, why stop at 60? Why not 55? If governments moved the retirement age down to 40 every young person would have a job and everyone would be living in the lap of luxury. Alas, the land of the lotus-eaters remains a myth. Get back to the office.