1. Does the welfare state make older workers unemployable? Gilles Saint-Paul TSE

2. Why is the labor market for the elderly different? Small remaining career time Falling productivity High rent component of total wage

3. Figure 1: the evolution of skills over the life cyle; source: Avolio and Waldman (1994)

4. Consequences Large losses of older workers who lose their jobs Greater likelihood of working in secondary sector Unemployment benefits more damaging to employment of older workers Firing costs have a smaller effect on employability (if age-neutral) Hiring costs have a larger effect

5. Example of age-specific EP The « Delalande » contribution Additional firing cost after 50 In 1993, was liberalized and no longer applied to those hired after 50 Behagel et al. (1998) have studied this experiment

6. Findings Monthly job finding rate of the 50+ increased by 0.5 % Strong substitution effects: reform made the 50+ more employable than the 50- Delalande tax reduced layoffs Effect on preventive layoffs positive but very small.

7. The role of hiring costs PDF of net profits lower for older workers Willingness to pay hiring cost lower Hiring costs therefore reduce the relative demand for older workers This is the « endgame » effect: under HC employability falls with distance from retirement

8. Figure 2: employment of older workers across countries. Source: Hairault et al. (2008)

9. A simple model People live for T units of time Initial productivity y H With prob. p(s), falls to y L Fixed wage w Hiring cost H Firing cost F(s) – F(s) = F 0, s < s* – F(s) = F 1, s > s*

10. The dismissal decision

11. s yLyL Figure 3: the firing frontier s*

12. s yLyL Figure 4: effect of tighter employment protection s*s ~

13. The hiring decision Three regimes: A: employability falls with age (endgame effect dominates throughout) B: employability is hump-shaped, due to a falling firing premium C: employability M-shaped, due to a large step in firing costs

18. The elderly in a flexible and rigid labor market France vs. US Compare the relative outcomes of the elderly in both countries, by education x sex group Outcome variables: – Employment rates – Unemployment – Transitions – Wages – Wage losses

19. A. Employment rates The dominant picture is that of a strong endgame effect Employment rates for 55-60 much lower in France than US This squares with the above model

28. GroupFranceUSF/US Men, HSD 0.570.710.80 Men, HS 0.660.840.79 Men, CD 0.620.840.73 Men, Coll G 0.890.900.99 Women, HSD 0.660.690.94 Women, HS 0.690.840.81 Women, CD 0.620.890.70 Women, Coll G 0.90 1.0 Table 1 – Relative employment rates of older workers by categories

29. B. Unemployment rates Large increase in UR in the mid-40s in France vs. the US. This may be due to lower demand, due to eg Delalande However, entitlement effect is more likely to operate here

38. Job finding rate Very strong endgame effect in France compared with US Both entitlement and endgame effects play a role for those workers The unskilled are particularly affected  additional role of minimum wage? Midlife discount in unemployment rates due to lower job loss rates and greater flows to non participation for older workers

40. Job loss rate Older workers fairly protected from job loss in France But very substantial transition to non participation

43. High School Dropout High SchoolSome collegeCollege Prime age 25-50 3.464.012.774.17 51-55 ratio 2.1 0.61 2.3 0.58 4.3 1.55 0.6 0.14 56-60 ratio 1.8 0.52 0.3 0.08 9.3 3.35 1.8 0.42 61-55 ratio 0.8 0.22 0.0 0 5.0 1.80 0.0 0 Table 2 – Job loss rate (E->U), men, France

44. High School Dropout High SchoolSome collegeCollege Prime age 25-50 4.133.072.463.09 51-55 ratio 3.7 0.90 1.7 1.18 0.9 0.35 2.4 0.77 56-60 ratio 1.3 0.31 1.4 0.63 0.0 0 0.0 0 61-55 ratio 0.2 0.05 4.9 1.59 0.0 0 0.0 0 Table 3 – Job loss rate (E->U), women, France

45. High School Dropout High SchoolSome collegeCollege Prime age 25-50 4.683.392.482.53 51-55 ratio 3.6 0.77 2.8 0.83 3.9 1.58 1.7 0.66 56-60 ratio 5.4 1.14 1.8 0.51 1.7 0.66 2.1 0.81 61-55 ratio 0.7 0.14 1.6 0.46 3.1 1.24 1.7 0.66 Table 4 – Job loss rate (E->U), men, United States

46. High School Dropout High SchoolSome collegeCollege Prime age 25-50 4.402.882.611.50 51-55 ratio 3.4 0.77 2.4 0.82 2.3 0.90 1.2 0.79 56-60 ratio 2.9 0.65 1.8 0.63 1.5 0.56 1.6 1.05 61-55 ratio 0.4 0.10 3.6 1.26 2.0 0.78 2.0 1.33 Table 5 – Job loss rate (E->U), women, United States

47. Wages Wages go up with age in France They are hump-shaped in the US Suggests wage formation in France makes older workers overpaid Exacerbates entitlement effect Creates support for differential employment protection

52. Wage losses Evidence suggests that wage losses are going up with age Effect slightly higher in the flexible economy (US) (counterpart of higher job finding rates)

53. Age categoryFranceUnited States 16-30-0.041 (0.015) -0.063 (0.016) 31-40-0.128 (0.021) -0.215 (0.021) 41-50-0.199 (0.026) -0.369 (0.022) 51-65-0.201 (0.039) -0.225 (0.030) Table 6 – Wage loss following unemployment spell, all workers (s.e. in parentheses)

54. Age categoryFranceUnited States 16-30-0.047 (0.021) -0.044 (0.021) 31-40-0.099 (0.032) -0.177 (0.027) 41-50-0.217 (0.039) -0.383 (0.029) 51-65-0.245 (0.058) -0.151 (0.040) Table 7 – Wage loss following unemployment spell, men (s.e. in parentheses)

55. Age categoryFranceUnited States 16-30-0.035 0.023 -0.067 0.024 31-40-0.148 0.028 -0.258 0.031 41-50-0.183 0.036 -0.361 0.033 51-65-0.161 0.054 -0.310 0.044 Table 8 – Wage loss following unemployment spell, women (s.e. in parentheses)

59. Policy aspects Important to reduce H for older workers But most of it is genuine Endgame effect is thus largely an efficient phenomenon

60. What would happen in a competitive market? Many elderly would stick to their current job, at the cost of lower wages Those who nevertheless lose it would endogenously retire or find a low paying, low hiring/training cost, job Somehow, European institutions emulate this outcome

61. However, this is probably inefficient Nothing guarantees that the right people are allocated to the two first outcomes The last outcome, low-paid job, is shut down

62. Policy proposals Reduce unemployment benefits Allow to cumulate pensions with jobs in actuarially fair way Or, more ambitiously, implement wage insurance scheme Deal with credit constraint with unemployment support account

63. How about the endgame effect? Analysis shows that employment rate of 55-60 should increase when retirement rate goes up Current employment rates are misleading (Lucas critique) But endgame effect cannot be eliminated, hence importance of a transitory semi-pensioned scheme