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Does the welfare state make
older workers unemployable?
Gilles Saint-Paul
TSE
Why is the labor market for the elderly
different?
• Small remaining career time
• Falling productivity
• High rent component of total wage
Figure 1: the evolution of skills over the life cyle; source: Avolio and Waldman (1994)
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
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
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.
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
Figure 2: employment of older workers across countries. Source: Hairault et al. (2008)
A simple model
•
•
•
•
•
•
People live for T units of time
Initial productivity yH
With prob. p(s), falls to yL
Fixed wage w
Hiring cost H
Firing cost F(s)
– F(s) = F0, s < s*
– F(s) = F1, s > s*
The dismissal decision
yL
s*
Figure 3: the firing frontier
s
yL
~
s*
s
Figure 4: effect of tighter employment protection
s
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
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
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
F ig u re 9 : E m p lo ym e n t ra te , m e n , h ig h -s c h o o l d ro p o u ts
9 0 .0
8 0 .0
7 0 .0
6 0 .0
5 0 .0
4 0 .0
F ra n c e
US
3 0 .0
2 0 .0
1 0 .0
0 .0
1 6 to 2 0
2 1 to 2 5
2 5 to 3 0
3 1 to 3 5
US
3 6 to 4 0
4 1 to 4 5
4 6 to 5 0
F ra n c e
5 1 to 5 5
5 6 to 6 0
6 1 to 6 5
F ig u re 1 0 : E m p lo ym e n t ra te s , m e n , h ig h s c h o o l g ra d u a te s
1 0 0 .0
9 0 .0
8 0 .0
7 0 .0
6 0 .0
5 0 .0
F ra n c e
4 0 .0
US
3 0 .0
2 0 .0
1 0 .0
0 .0
1 6 to 2 0
2 1 to 2 5
2 5 to 3 0
3 1 to 3 5
US
3 6 to 4 0
4 1 to 4 5
4 6 to 5 0
F ra n c e
5 1 to 5 5
5 6 to 6 0
6 1 to 6 5
F ig u re 1 1 : E m p lo ym e n t ra te s , m e n , s o m e c o lle g e
1 0 0 .0
9 0 .0
8 0 .0
7 0 .0
6 0 .0
5 0 .0
F ra n c e
4 0 .0
US
3 0 .0
2 0 .0
1 0 .0
0 .0
1 6 to 2 0
2 1 to 2 5
2 5 to 3 0
3 1 to 3 5
US
3 6 to 4 0
4 1 to 4 5
4 6 to 5 0
F ra n c e
5 1 to 5 5
5 6 to 6 0
6 1 to 6 5
F ig u re 1 2 : E m p lo ym e n t ra te s , m e n , c o lle g e g ra d u a te s
1 0 0 .0
9 0 .0
8 0 .0
7 0 .0
6 0 .0
5 0 .0
F ra n c e
4 0 .0
US
3 0 .0
2 0 .0
1 0 .0
0 .0
2 1 to 2 5
2 5 to 3 0
3 1 to 3 5
3 6 to 4 0
US
4 1 to 4 5
4 6 to 5 0
5 1 to 5 5
F ra n c e
5 6 to 6 0
6 1 to 6 5
F ig u re 1 3 : E m p lo ym e n t ra te s , w o m e n , h ig h s c h o o l d ro p o u ts
8 0 .0
7 0 .0
6 0 .0
5 0 .0
4 0 .0
F ra n c e
3 0 .0
US
2 0 .0
1 0 .0
0 .0
1 6 to 2 0
2 1 to 2 5
2 5 to 3 0
3 1 to 3 5
US
3 6 to 4 0
4 1 to 4 5
4 6 to 5 0
F ra n c e
5 1 to 5 5
5 6 to 6 0
6 1 to 6 5
F ig u re 1 4 : E m p lo ym e n t ra te , w o m e n , h ig h s c h o o l g ra d u a te s
9 0 .0
8 0 .0
7 0 .0
6 0 .0
5 0 .0
4 0 .0
F ra n c e
US
3 0 .0
2 0 .0
1 0 .0
0 .0
1 6 to 2 0
2 1 to 2 5
2 5 to 3 0
3 1 to 3 5
US
3 6 to 4 0
4 1 to 4 5
4 6 to 5 0
F ra n c e
5 1 to 5 5
5 6 to 6 0
6 1 to 6 5
F ig u re 1 5 : E m p lo ym e n t ra te s , w o m e n , s o m e c o lle g e
9 0 .0
8 0 .0
7 0 .0
6 0 .0
5 0 .0
4 0 .0
F ra n c e
US
3 0 .0
2 0 .0
1 0 .0
0 .0
1 6 to 2 0
2 1 to 2 5
2 5 to 3 0
3 1 to 3 5
US
3 6 to 4 0
4 1 to 4 5
4 6 to 5 0
F ra n c e
5 1 to 5 5
5 6 to 6 0
6 1 to 6 5
F ig u re 1 6 : E m p lo ym e n t ra te , w o m e n , c o lle g e g ra d u a te s
9 0 .0
8 0 .0
7 0 .0
6 0 .0
5 0 .0
4 0 .0
F ra n c e
US
3 0 .0
2 0 .0
1 0 .0
0 .0
2 1 to 2 5
2 5 to 3 0
3 1 to 3 5
3 6 to 4 0
US
4 1 to 4 5
4 6 to 5 0
5 1 to 5 5
F ra n c e
5 6 to 6 0
6 1 to 6 5
Group
France
US
F/US
Men, HSD
0.57
0.71
0.80
Men, HS
0.66
0.84
0.79
Men, CD
0.62
0.84
0.73
Men, Coll G
0.89
0.90
0.99
Women, HSD
0.66
0.69
0.94
Women, HS
0.69
0.84
0.81
Women, CD
0.62
0.89
0.70
Women, Coll G
0.90
0.90
1.0
Table 1 – Relative employment rates of older workers by categories
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
F ig u re 1 7 : U n e m p lo ym e n t ra te , m e n , h ig h -s c h o o l d ro p o u ts
2 5 .0
2 0 .0
1 5 .0
F ra n c e
1 0 .0
US
5 .0
0 .0
1 6 to 2 0
2 1 to 2 5
2 5 to 3 0
3 1 to 3 5
US
3 6 to 4 0
4 1 to 4 5
4 6 to 5 0
F ra n c e
5 1 to 5 5
5 6 to 6 0
6 1 to 6 5
F ig u re 1 8 : U n e m p lo ym e n t ra te s , m e n , h ig h s c h o o l g ra d u a te s
1 4 .0
1 2 .0
1 0 .0
8 .0
6 .0
F ra n c e
US
4 .0
2 .0
0 .0
1 6 to 2 0
2 1 to 2 5
2 5 to 3 0
3 1 to 3 5
US
3 6 to 4 0
4 1 to 4 5
4 6 to 5 0
F ra n c e
5 1 to 5 5
5 6 to 6 0
6 1 to 6 5
F ig u re 1 9 : U n e m p lo ym e n t ra te s , m e n , s o m e c o lle g e
1 0 .0
9 .0
8 .0
7 .0
6 .0
5 .0
F ra n c e
4 .0
US
3 .0
2 .0
1 .0
0 .0
1 6 to 2 0
2 1 to 2 5
2 5 to 3 0
3 1 to 3 5
US
3 6 to 4 0
4 1 to 4 5
4 6 to 5 0
F ra n c e
5 1 to 5 5
5 6 to 6 0
6 1 to 6 5
F ig u re 2 0 : U n e m p lo ym e n t ra te s , m e n , c o lle g e g ra d u a te s
1 6 .0
1 4 .0
1 2 .0
1 0 .0
8 .0
F ra n c e
6 .0
US
4 .0
2 .0
0 .0
2 1 to 2 5
2 5 to 3 0
3 1 to 3 5
3 6 to 4 0
US
4 1 to 4 5
4 6 to 5 0
5 1 to 5 5
F ra n c e
5 6 to 6 0
6 1 to 6 5
F ig u re 2 1 : U n e m p lo ym e n t ra te s , w o m e n , h ig h s c h o o l d ro p o u ts
2 5 .0
2 0 .0
1 5 .0
F ra n c e
1 0 .0
US
5 .0
0 .0
1 6 to 2 0
2 1 to 2 5
2 5 to 3 0
3 1 to 3 5
US
3 6 to 4 0
4 1 to 4 5
4 6 to 5 0
F ra n c e
5 1 to 5 5
5 6 to 6 0
6 1 to 6 5
F ig u re 2 2 : U n e m p lo ym e n t ra te , w o m e n , h ig h s c h o o l g ra d u a te s
1 2 .0
1 0 .0
8 .0
6 .0
F ra n c e
US
4 .0
2 .0
0 .0
1 6 to 2 0
2 1 to 2 5
2 5 to 3 0
3 1 to 3 5
US
3 6 to 4 0
4 1 to 4 5
4 6 to 5 0
F ra n c e
5 1 to 5 5
5 6 to 6 0
6 1 to 6 5
F ig u re 2 3 : U n e m p lo ym e n t ra te s , w o m e n , s o m e c o lle g e
1 0 .0
9 .0
8 .0
7 .0
6 .0
5 .0
F ra n c e
4 .0
US
3 .0
2 .0
1 .0
0 .0
1 6 to 2 0
2 1 to 2 5
2 5 to 3 0
3 1 to 3 5
US
3 6 to 4 0
4 1 to 4 5
4 6 to 5 0
F ra n c e
5 1 to 5 5
5 6 to 6 0
6 1 to 6 5
F ig u re 2 4 : U n e m p lo ym e n t ra te , w o m e n , c o lle g e g ra d u a te s
1 4 .0
1 2 .0
1 0 .0
8 .0
6 .0
F ra n c e
US
4 .0
2 .0
0 .0
2 1 to 2 5
2 5 to 3 0
3 1 to 3 5
US
3 6 to 4 0
4 1 to 4 5
F ra n c e
4 6 to 5 0
5 1 to 5 5
5 6 to 6 0
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
F ig u re 2 7 : jo b fin d in g ra te
7 0 .0
6 0 .0
5 0 .0
4 0 .0
F ra n c e
U n ite d S ta te s
3 0 .0
2 0 .0
1 0 .0
0 .0
2 1 to 2 5
2 5 to 3 0
3 1 to 3 5
3 6 to 4 0
4 1 to 4 5
4 6 to 5 0
5 1 to 5 5
5 6 to 6 0
6 1 to 6 5
Job loss rate
• Older workers fairly protected from job
loss in France
• But very substantial transition to non
participation
F ig u re 2 5 : E -> U tra n s itio n s
8 .0
7 .0
6 .0
5 .0
F ra n c e
4 .0
U n ite d S ta te s
3 .0
2 .0
1 .0
0 .0
2 1 to 2 5
2 5 to 3 0
3 1 to 3 5
3 6 to 4 0
4 1 to 4 5
4 6 to 5 0
5 1 to 5 5
5 6 to 6 0
6 1 to 6 5
F ig u re 2 6 : E --> n o n E tra n s itio n
4 0 .0
3 5 .0
3 0 .0
2 5 .0
F ra n c e
2 0 .0
U n ite d S ta te s
1 5 .0
1 0 .0
5 .0
0 .0
2 1 to 2 5
2 5 to 3 0
3 1 to 3 5
3 6 to 4 0
4 1 to 4 5
4 6 to 5 0
5 1 to 5 5
5 6 to 6 0
6 1 to 6 5
High School
Dropout
High School
Some college College
Prime age
25-50
3.46
4.01
2.77
4.17
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
High School
Dropout
High School
Some college College
Prime age
25-50
4.13
3.07
2.46
3.09
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
High School
Dropout
High School Some college College
Prime age
25-50
4.68
3.39
2.48
2.53
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
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
F ig u re 2 8 : m e d ia n w a g e , F ra n c e , m e n
3 5 ,0
3 0 ,0
2 5 ,0
2 0 ,0
H ig h S ch o o l d ro p o u ts
H ig h sch o o l
S o m e co lle g e
C o lle g e g ra d u a te s
1 5 ,0
1 0 ,0
5 ,0
0 ,0
2 1 to 2 5
2 5 to 3 0
3 1 to 3 5
3 6 to 4 0
4 1 to 4 5
4 6 to 5 0
5 1 to 5 5
5 6 to 6 0
6 1 to 6 5
F ig u re 2 9 : w a g e s , w o m e n , F ra n c e
2 5 ,0
2 0 ,0
1 5 ,0
H ig h sch o o l d ro p o u t
H ig h sch o o l
S o m e co lle g e
C o lle g e g ra d u a te s
1 0 ,0
5 ,0
0 ,0
2 1 to 2 5
2 5 to 3 0
3 1 to 3 5
3 6 to 4 0
4 1 to 4 5
4 6 to 5 0
5 1 to 5 5
5 6 to 6 0
6 1 to 6 5
F ig u re 3 0 : m e d ia n w a g e , U S A , m e n
2 5 ,0
2 0 ,0
1 5 ,0
H ig h S ch o o l d ro p o u ts
H ig h sch o o l
S o m e co lle g e
C o lle g e g ra d u a te s
1 0 ,0
5 ,0
0 ,0
2 1 to 2 5
2 5 to 3 0
3 1 to 3 5
3 6 to 4 0
4 1 to 4 5
4 6 to 5 0
5 1 to 5 5
5 6 to 6 0
6 1 to 6 5
F ig u re 3 1 : w a g e s , w o m e n , U S A
2 0 ,0
1 8 ,0
1 6 ,0
1 4 ,0
1 2 ,0
H ig h sch o o l d ro p o u t
H ig h sch o o l
1 0 ,0
S o m e co lle g e
C o lle g e g ra d u a te s
8 ,0
6 ,0
4 ,0
2 ,0
0 ,0
2 1 to 2 5
2 5 to 3 0
3 1 to 3 5
3 6 to 4 0
4 1 to 4 5
4 6 to 5 0
5 1 to 5 5
5 6 to 6 0
6 1 to 6 5
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)
Age category
France
United 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)
Age category
France
United 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)
Age category France
United 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)
F ig u re 3 2 : W a g e e ffe c ts o f u n e m p lo ym e n t, b y a g e
0
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
-0 ,0 5
-0 ,1
-0 ,1 5
F ra n ce
U n ite d S ta te s
-0 ,2
-0 ,2 5
-0 ,3
-0 ,3 5
F ig u re 3 3 , w a g e e ffe c ts o f u n e m p lo ym e n t s p e lls , m e n
0
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
-0 ,0 5
-0 ,1
-0 ,1 5
-0 ,2
-0 ,2 5
-0 ,3
F ra n ce
U n ite d S ta te s
F ig u re 3 4 : w a g e lo s s fro m u n e m p lo ym e n t, w o m e n
0
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
-0 ,0 5
-0 ,1
-0 ,1 5
-0 ,2
F ra n ce
U n ite d S ta te s
-0 ,2 5
-0 ,3
-0 ,3 5
-0 ,4
-0 ,4 5
Policy aspects
• Important to reduce H for older workers
• But most of it is genuine
• Endgame effect is thus largely an efficient
phenomenon
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
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
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
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
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