What are the causes of age discrimination in employment? Mathias Hungerbühler FUNDP Namur

Outline Definition and measurement of discrimination in economic theory Economic theories of discrimination What explains diffrences with respect to age in labour market outcomes? Is there age discrimination in labour markets?

Definition There is discrimination if irrelevant factors affect the (economic) outcomes. e.g. does race/gender affect wages of individuals, hiring or firing decisions of employers? What are “relevant factors” and which factors are considered “irrelevant”?

Measurement of discrimination “relevant” factors that might explain differences, e.g. education, experience, … outcome to be explained, e.g. wage or employment rate “irrelevant” factor, e.g. race, gender, … error term coefficients to be estimated

Caveats of the measurement What are the explanatory variables? (Is age an explanatory variable?) Discrimination in explanatory variables (e.g. education) Endogeneity problems (e.g. is education lower because there is discrimination?) discrimination or unexplained differences? (problem of ommitted variables)

The “taste” theory of discrimination Employers might have a taste for discrimination of certain groups of the population e.g. some employer might pay black people constantly less than white people by discriminating people, the employer reduces its profits hence, if markets are competitive, this kind of discrimination is not sustainable! (but what if markets are not competitive?)

The taste theory of discrimination consumers might have a taste for discrimination e.g. you want to be served in a bar by a young women rather than an old man hence, a young woman is more productive in this job, simply because customers discriminate this kind of discrimination is thus sustainable in competitive markets

Statistical discrimination The employer cannot observe the caracteristics of an individual, but only the caracteristics of the group to which this individual belongs e.g. an employer cannot observe whether a woman is going to spend time off job for childcare, but he knows that on average, women are more often off the job to care their sick children than men Hence, the employer bases his decisions on the group’s characteristics and discriminates individuals

Statistical discrimination Even though statistical discrimination is not efficient, it is sustainable in an economic equilibrium The main problem is that information is private to individuals and there is no possibility for credible commitement e.g. a woman cannot credibly commit to not having children

Hiring discrimination in imperfect labor markets For a vacancy, an employer might get several applications of equally qualified individuals He might then discriminate because he has some taste for it This kind of discrimination is sustainable It predicts that the discriminated group has both lower wages and lower employment (higher unemployment)

Differences in labour market outcomes with respect to age wages hiring promotion training / continuous education firing

« Standard » factors that are able to explain part of these differences education experience sector of employment etc.

Forward-looking employers and differences An old individual will most probably stay less time in the firm than a young individual A rational employer takes account of this when it comes to hiring, firing, etc. e.g. he rationally chooses to hire a younger individual Is this discrimination? Most economists would answer negatively… i.e. they consider that age is a relevant factor in this case

… and its policy response to soften the situation of the old, the government has set up generous pre-retirement plans that are partly publicly financed Though this softens the situation of the old, it also gives incentives to the firm to fire old people rather than the young. There are thus perverse effects of this policy measure.

Wages and hiring Are wages of the old « too high »? Incentives to set wages of the old high given by pension plans e.g. pensions are calculated on the last five years of contribution. Hence, employers and unions agree to set the olds’ wages at a « too high » level Thus, an employer will hesitate to hire an old individual and their probability of being fired increases.

Attachement of old people Old individuals might less mobile across geographical regions and economic sectors e.g. an old might own his house, which will decrese his geographical mobility hence, he will have more difficulties to find a new job, and he can less threaten his current employer that he might leave his job if he gets a better offer

Individual choices? Unemployed old individuals have more difficulties to find a new job than young people… … but if they find a new job, their wage is higher than the wage for the young individuals! Are old people simply more selective in job applications and acceptance?

Is there age discrimination in labour markets? Are the previous-mentionned mechanisms « discriminatory »? It is almost impossible to measure age discrimination in the usual way discrimination is measured in economics, since age is certainly also an explanatory variable Is there taste discrimination? Statistical discrimination? Hiring discrimination?

Conclusions… There are differences with respect to age in labour market outcomes There are plenty of non-discriminatory factors that are able to explain part of these differences Standard econometric techniques are not able to state whether there is age discrimination or not. Case studies might be more informative. Hence, economists can unfortunately not say much about the existence or not of age discrimination