Yesterday, I was writing about how we in Europe and other developed countries might follow in the footsteps of Japan by increasing labour participation rates among older people – not because older people want to go back to work, but because they have to in order to survive. More and more older people in Japan continue to work in low wage jobs as shop clerks and in service jobs.
There is an obvious pushback to this argument, namely that we live in an age of rapid automation and digitalisation and these low wage jobs are becoming increasingly rare. A recent study in Finland has shown how these trends work in practice. First, people who work in jobs that are at high risk of automation are more likely to enter retirement early (increasing rapidly at age 57 when pensioners in Finland can get almost full retirement benefits). The charts below are dominated by the group of people who are exiting the labour market to become inactive for a couple of years, but if we focus on the share of people who face unemployment or apply for disability benefits after losing their jobs, we see that people who work in jobs that are at high risk of automation are more likely to be made redundant in their late 50s. And once retirement benefits become more generous at age 57, they experience a sudden jump in the likelihood of being made redundant.
Likelihood of entering retirement in Finland
Source: Yashiro et al. (2020). Note: Data shows the average of 2007 to 2017.
During the pandemic, these trends have only been accelerated with people working in jobs that can be automatized being made redundant at even higher rates than the ones experienced before.
Likelihood of entering retirement in Finland during the pandemic
Source: Yashiro et al. (2020).
The analysis of people losing their job shows that companies know that making people above the age of 55 redundant is better for them because these workers have a bigger safety net to fall back on than younger employees. As a result, companies strategically target older employees for redundancies.
Of course, what is good for each individual business is bad for society overall because it increases the problem of the rising old-age dependency ratio. Thus, we need to create incentives for businesses, not to fire older employees. One such suggestion that is being discussed is to introduce a tax on robots. Personally, I find that a rather unintuitive concept. How are we supposed to calculate the size of the tax to pay for the additional costs of people being made redundant. I am not against a tax on robots as a concept, but I find it hard to sketch out a path to how it can work in the real world.
So, I had a thought: Why don’t we force companies who make older employees redundant to pay the bill for the burden they put on societies? I am in general a big fan of internalising externalities in order to make markets work properly and allow them to find the right price for labour (or in this case, the right price for the reduction of labour). It’s the same concept as making companies pay for the environmental damages they cause, just in this case, we make them pay for the social damages they cause.
Such a cost for making people redundant could be phased in for all employees aged 50 and would be calculated as the present value of the unemployment and welfare benefits the employees is eligible until he or she reaches retirement age (plus the expected contributions to his or her social security and pensions). In essence, companies who let older people go, need to buy an annuity that pays for the costs these people create to the welfare system of a country until their retirement. If the people the companies let go find paid employment again, the remaining value of the annuity is paid back to the employer.
The value of such an annuity is easy to calculate. Every insurance company that offers private pension annuities knows how to do it. And the result would be that employers have much less of an incentive to fire older employees and replace them with machines or younger, cheaper workers and an additional incentive to help them find a job after they are being made redundant (because then they get part of their annuity back). And at the same time, the government would recoup much if not all of its costs from the businesses and wouldn’t be forced to increase taxes for all of us or reduce benefits for future pensioners.
Does this not just shift the age at which companies make workers redundant to 49 given that companies are not willing to pay for these social damage annuities?
Thank you for your blogs very insightful
I think companies would plan the labour hiring process in accordance to reduce their monetary liabilities associated with redundancy process. In fact they could probably even stop hiring older people altogether and play hot potato with the older workforce. It would also be complicated to implement with higher rate of casualisation in the labour market.
In my opinion, there should be incentives on keeping an employee long term instead. The longer an employee stays with the company would provide incremental incentives for the company.
Companies are quite responsive to incentives and rather extremely adept at avoiding any kind of punishment driven policies.