Old workers don’t displace the young — prefer empirics

The assumption that there is an upper limit on the number of jobs in an economy—the “lump-of-labor fallacy”—has no theoretical justification; nor is there empirical evidence to support such a view. In fact, as economies become more complex and grow due to specialization, additional jobs are being created. Technological progress, while rendering some occupations obsolete, constantly creates demand for new occupations. Research shows that having older people active and productive actually benefits all age groups and spurs the creation of more jobs. A 2012 analysis of Current Population Survey data tested for changes in employment among US workers under the age of 55 when those aged 55 and older worked in greater numbers [3]. The study found no evidence that younger workers lost work; in fact, it found the opposite: greater employment, reduced unemployment, and higher wages. Another example of this effect is seen in the expansion of the employment of women during the second half of the 20th century in OECD countries: women did not replace men in the workforce; on the contrary, the transition to two-earner families increased disposable income, created new demand, and prompted firms to hire more workers. (It could be argued that in the very short term the number of jobs was fixed, because it takes time for this virtuous cycle to operate. However, it is known from a vast literature that there is an impressive amount of simultaneous job creation and job destruction, which stresses that even in the very short term the number of jobs is not limited.) Are young workers substitutes for older workers? If firms faced higher labor costs following an increase in the retirement age (e.g. because seniority decreases the profitability of older workers), they could substitute younger workers for older workers. Economic theory suggests that any substitution of one type of worker with another is governed by the similarity of the skills they possess. Empirical evidence, however, suggests that even workers of similar skills who differ by as little as five years in age are already imperfect substitutes, suggesting that firms would have, at most, a limited ability to substitute young workers for older ones [4]. As a consequence, the hiring behavior of firms in response to the cost of older workers indicates that substitution between young and old workers is limited. Even when the cost of employing older workers is significantly increased, the substitution of older with younger workers is moderate in scope [5]. Skill-based technical change might further decrease the substitutability between workers of different age cohorts. Technical change constantly adjusts the demand for skills. Although many jobs can now be more cheaply undertaken by computers, the demand for higher levels of skills (e.g. software engineers) has increased. However, learning new skills is costly and older workers may not invest in acquiring new skills if their remaining working life is too short to recoup the costs. In contrast, younger workers will more readily learn new skills because the period over which they can recover their costs is longer. Studies of US data indicate that the sector-specific rate of technological progress leads to more unemployment and the early retirement of older workers [6]. With older workers more likely to exit the labor market under these circumstances, rapid technological change makes the possibility of substituting younger workers for older ones even less likely.