Thursday, June 18, 2009

Encouraging early retirement does not increase youth employment

The goal of early retirement incentives is to shed expensive older employees for a younger workforce. This has two intended consequences: reduce the unemployment rate of the young, which is particularly high, and reduce the costs for the employer. I am not convinced about the latter in the case that the employer has to supply a pension, but what about the former?

Sorry to disappoint you, but that does not seem to work either, at least at the aggregate level. Adrian Kalwij, Arie Kapteyn and Klaas de Vos show using data from 22 OECD countries that the young and old labor forces are not substitutes, they may even be slight complements. Thus: scrap those silly early retirement incentives, and think seriously about allowing workers to work past 65, or even raise the retirement age. It will not affect youth employment.

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