Labour Markets
European Ageing

At a CEPR lunchtime meeting with the Anglo-German Foundation for the Study of Industrial Society held in Bonn on 18 May, Paul Johnson and Klaus F Zimmermann discussed the implications of population ageing for European labour markets. Johnson is Lecturer in Social History at the London School of Economics and Political Science and a Research Fellow in CEPR's Human Resources programme. Zimmermann is Dean of the Faculty of Economics and Director of the Seminar for Labor and Population Economics at the Universität München and Co-Director of CEPR's Human Resources programme. Their remarks drew on their book 'Labour Markets in an Ageing Europe' . The views expressed by the speakers were their own, however, not those of the Anglo-German Foundation nor of CEPR, which takes no institutional policy positions.

Johnson stated that ageing is expected to reduce the EC(12) population by 2% by the year 2025. While the implications for public expenditure on pensions and medical services and associated tax liabilities are now matters of widespread public concern and discussion, effects on the current and future welfare of younger age groups have received much less attention. Numbers of young workers entering European labour markets are already in decline while those of workers in middle age are increasing, which is likely to put upward pressure on labour costs and may reduce productivity. If public education and training systems continue to assume that general learning will stop once full-time work begins, the stock of general skills will age with the labour force while the pace of technological change is increasing, which may also reduce productivity. Governments may have to initiate new laws and regulations on in-service training for older workers in order to establish comprehensive schemes, since employers' own initiatives may be undermined by free-riding.

Johnson also noted that earlier retirement and ageing populations may also induce labour shortages, which may be best counteracted by policies to reverse the falling retirement age, which would also reduce the pensions burden. Implementing such changes would require major public policy intervention, however, since the qualification age for a public pension is a major inducement to retire, especially if its deferral is not compensated by actuArial,Helvetica,Sans-Serifly fair adjustments; many policies developed to curtail recorded unemployment have also encouraged early exit. Earnings profiles and private pension scheme regulations also determine retirement behaviour. The accrual rules of occupational schemes, which account for most earnings-related pension saving in the UK and US, also preclude flexible retirement. Pensions are typically based on workers' final salaries rather than lifetime contributions. Workers therefore face strong incentives to retire when their earnings peak, whereas promoting labour market flexibility by allowing older workers to move to less demanding, lower-paid employment might raise overall productivity.

Zimmermann argued further that the threat posed to competitiveness by ageing may be exaggerated: it will hurt the economy only if innovative production requires newly formed human capital rather than a larger stock of experience, while measurable declines in performance due to ageing whether through increased absenteeism, poorer health or reduced work motivation are small. Increased labour costs will induce capital investment which in turn will enhance labour productivity, although there will be efficiency losses if older workers are less willing to change jobs, industries or regions. This may also raise the average duration of unemployment, and the extent to which older workers can replace younger ones is also uncertain. Thus mismatch between labour demand and supply may increase because of immobility, inappropriate skills and older workers' unwillingness to accept wages paid to the young.

Zimmermann then considered three possible strategies available to ageing countries such as Germany, focusing on the roles of labour mobility and human capital formation. First, `demographic' measures include pro-natalist policies and selective immigration; only the latter seems feasible, and economically motivated migration must be at least potentially temporary in a longer perspective. Second, mobilizing `fringe' groups in society that are insufficiently integrated into the labour market the unemployed, non-working women and pensioners can play only a limited role; there is a danger of mismatch between supply and demand, while the incentive effects of any policy measures to promote such participation are likely to be small. Third, governments may undertake measures to promote productivity by increasing either the effort or quality of work or physical capital. Restructuring tax and welfare systems has been shown to be less effective than expected in creating appropriate incentives; governments may therefore do better to devote more attention to technology policy and human capital formation, in particular by applying market mechanisms rather than further dirigisme to the educational system.