Beyond the concept of the “fixed number” of jobs

Written by:

Elsa Fornero (University of Turin and Collegio Carlo Alberto)
Ivan Lagrosa (Bocconi University & IGIER)

The complex relationship between the pension system and the labor market:

Social security reforms focused on increasing the retirement age have often been accompanied by strong criticism and concerns about their possible impact on employment, particularly of young people and women. Both the economic logic and the data show, however, how these fears are not necessarily founded and how are instead appropriate policies aimed at giving sustainability to the system retirement not only through formulas of greater equity within and between generations, but also through measures to make the labor market more inclusive and dynamic.

Demography, economic growth and innovation: a context of complex relationships
The progress in health conditions, the increase in life expectancy and the sharp fall in birth rates have led to a demographic transition that is leading to a partial inversion of the pyramid by age of the population: few young people at the base and an ever-increasing number of senior citizens at the top. (figure 1):

The phenomenon obviously does not concern only our country: according to estimates by Eurostat, in 2080 the share of the European population between 15 and 64 will change from the current two thirds to just over half, to the benefit of the share of people with more than 64 years, which will reach 28.1 percent instead.

While demographic changes are reshaping our society by focusing on the problems affecting relations between generations and migratory phenomena, on the other, low rates of economic growth exacerbate the demographic problem, making it more difficult to finance promised services. in years when everything seemed to have to prosper endlessly. From here, if we restrict the field to the world of pensions, the urgency and the need for structural reforms that improve the interaction between the labor market and the social security system, through the increase in participation rates and investment in capital human, ie the skills and knowledge necessary for productivity growth. In a context of strong technological innovation, the theme of competences will indeed be crucial for guaranteeing good work paths and, therefore, adequate social security benefits. Investments in the training system and, in particular, in continuous training mechanisms will be more than ever necessary to provide workers with the skills required by a continuously – and increasingly rapid – evolving labor market.

Labor market and social security system:
With the introduction of the contributory method of calculating pension benefits, in the absence of a good working life – in terms of quality and continuity – it is impossible to develop a good pension. Two important consequences derive from this consideration: political action must firstly focus on the conditions that favor the employment of the largest possible number of people and, on the other, assist those who have reached retirement age, they bring in an unfortunate work path and therefore a “pension wealth” insufficient to finance an adequate pension. The relationship between the pension system and the labor market is therefore binary: a good labor market, inclusive and dynamic, is the best prerequisite for obtaining adequate pensions; and a good pension system must not penalize work, making early exit (retirement pension) convenient, but rather must encourage employment, obviously of people in good physical condition.
On the labor market front, one of the greatest difficulties today concerns the precarious work and income of young people, which requires first of all interventions on the scholastic and extra-scholastic training processes, and measures to make the various accompanying measures work. integration and activation already foreseen by the system.
On the other hand, the employment difficulties of older people run the risk of nullifying the effect of increasing retirement age on the extension of working life. Training programs specifically targeted at this age group, the expansion of part-time and (why not?) Options, occasional but regular, pension loans and, even, figurative contributions represent a battery of instruments that can be perfectly integrated into the contributory pension system.

Work less to work all?
Beyond the changes in the pension formulas – from the retributive to the contributory ones – the demographic dynamics of the last decades have forced numerous OECD countries to raise the retirement age, with the aim of making the respective pension systems sustainable over time. Similar adaptation interventions have often been accompanied, in Italy as abroad, by strong concerns about their possible impact on the employment side, in particular with an eye to young people. In order for a prolonged stay in the workplace of the elderly to have a negative impact on the employment opportunities of the young people, on the one hand, the jobs offered by a market may be considered as fixed over time – a sort of zero-sum budget. – and that, on the other, young and old can be easily replaced in their workplace.
The logic that led Italy – and many other European countries – to lower the effective retirement age until almost the middle of the 1990s, despite the repeated alarms on the sustainability of social security systems, is known in economics as the error of the fixed number of jobs: if the elderly remain in business – it is claimed – there are fewer places for young people. Consequently, it is considered opportune, socially as well as individually, to promote early retirement in order to make way for young people.
However, this is a logic that has no basis in economic theory and which finds little feedback in the data. In fact, the setting of the fixed number of jobs to be divided among workers must be reversed to ask what the characteristics of an inclusive and dynamic labor market are and what policies can incentivize it. From an empirical point of view, data observation shows that countries in which the activity rates of older people are higher are also those with the highest employment rates of young people and women. Although there are no hard rules in economics, Gruber, Milligan and Wise write that “there is no evidence that getting older workers out of the labor market will make jobs available to young people. If anything, the opposite is true; paying because a senior worker exits the labor force reduces the employment rate and increases the unemployment rate of young people and workers with a few years of seniority ». Even more convincing is the evidence provided by the positive relationship between the creation of new jobs for young people and the elderly respectively [Figures 2 and 3]. If there were a mechanism of substitution for the increase of ones it would correspond to a reduction of the others. If they grow together, it means that other factors (for example a lower cost or greater flexibility – not precariousness – of work) are able to determine the growth of both.

Variation of employement rate, average 2007-17
Variation of unemployement rate, average 2007-17

Of course, what is worthwhile in the trend may not be confirmed in the short term or in recessionary circumstances, when an increase in the exit age could have a negative effect on the employment of the weaker segment of the labor market, now represented almost everywhere – but in Italy in a particularly accentuated way – by young people. This is the empirical evidence presented in a recent study by T. Boeri, P. Garibaldi and E. Moen. The research, looking at the INPS figures on the corporate tax returns of companies with more than 15 private sector employees – remained active throughout the 2008-2014 period – suggests that the 2011 reform has led to a substitution effect between the employment of older people and that of the youngest, which has experienced a quantifiable reduction in about 37,000 units.
However, a study by the Bank of Italy on data from the ISTAT Labor Force Survey for the period 2004-2016, led by F. Carta, F. D’Amuri and T.M. Wachter (work in progress, cited in the Governor’s Final Considerations 2017), soon to be published, instead shows clear complementary effects also in the short term: at the turn of the 2011 reform, in the period 2004-2016, the relationship between the rate variation youth employment and the change in the employment rate of older people has remained positive; checking for the cyclical conditions, the increase in the number of older workers (55-69 years) is therefore accompanied by an increase, albeit of a lesser extent, by younger workers (15-34 years).

To conclude:
The challenges that await our economies in the coming decades are expected to be large and complex: from the aging of the population to the dynamics of low economic growth, passing through a technological innovation that will deeply revolutionize the labor market. With the reforms of the financial sustainability of the pension system, it is now necessary to address the political agenda to actions that act on the employment front, to prepare workers and businesses to seize the opportunities arising from the use of new technologies, and to protect those who instead they are damaged today, in work and salaries, and tomorrow, in retirement. While apprenticeships, continuous training and effective active policies are tools that can alleviate the employment problem, the payment, by the general tax system, of contributions for periods of absence from work due to unemployment or nursing work appears to be able to tackle the pension problem of young people better than promises made by politicians without any connection to the creation of new wealth.

The work, in its first part, contains a summary of more fully developed topics in:
Elsa Fornero, Who is afraid of reforms, Illusions, clichés and truth about pensions, Università Bocconi Editore, 2018.
The empirical part instead refers to:
J. Gruber and D. Wise, (eds.) Social security programs and retirement around the word. The relationship to youth employment, The University of Chicago Press, 2010
T. Boeri, P. Garibaldi and E. Moen, A clash of generations? Increase in Retirement Age and Labor Demand for Youth,