Remain, Retrain or Retire: Options for older workers following job loss John Deutsch Institute, Retirement Policy Issues in Canada October 27, 2007
Overview Overview: Options for older workers following job loss Remain in the labour force - face large and persistent earnings losses Retrain for a new career - short time period to enjoy the benefits Retirement - spread retirement savings over a longer period than expected Policy Response Income support programs Wage subsidy schemes Job search assistance Education and Training Goal - inform that policy debate
The incidence of job loss Figure 1: Permanent Layoff and Displacement Rates 10 9 8 Men, Permanent Layoff 7 Percent of workers 6 5 4 Women, Permanent Layoff 3 2 1 0 Men, Closure + Mass Layoff 1988 1990 1992 1994 1996 1998 2000 2002 Men 25-49 Permanent Layoff Men 50-64 Permanent Layoff Men 25-49 Closure + Mass Layoff Men 50-64 Closure + Mass Layoff Women 25-49 Permanent Layoff Women 50-64 Permanent Layoff
The incidence of job loss Characteristics of older displaced workers Among those displaced from full-time employment over age 50: slightly older less educated private sector non-union low seniority manufacturing vs. health care
Remaining in the labour force - Unemployment Figure 2: Average Unemployment Duration 45 40 35 Weeks unemployed 30 25 20 Age 25-54 Age 55-64 15 Age 15-24 10 5 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Men, Age 55-64 Men, Age 25-54 Men, 15-24 Women, Age 55-64 Women, Age 25-54 Women, Age 15-24
Remaining in the labour force - earnings losses Table 2: Earnings losses of men by age group 50-69 35-49 25-34 Displaced 2 years before -2263-7541 *** -1207 (6128) (2249) (2785) 1 year before -85-4209 ** -4901 ** (3700) (1939) (2386) year of displacement -12036 *** -12625 *** -11011 *** (3635) (1654) (1803) 1 year after -14565 *** -16470 *** -12549 *** (2365) (1740) (1897) 2 years after -10417 *** -13851 *** -11375 *** (2419) (1978) (1969) Standard errors in parentheses.
Remaining in the labour force - earnings losses Figure 3: Earnings losses of men by age group 0-2000 -4000-6000 -8000-10000 -12000-14000 -16000-18000 -2-1 0 1 2 Men Age 50-69 Men Age 35-49 Men Age 25-34
Remaining in the labour force - earnings losses Figure 4: Earnings losses of men, 50-69, by seniority 15000 10000 5000 0-5000 -10000-15000 -20000-25000 -2-1 0 1 2 Years since displacement Male - High Tenure Male - Low Tenure
Remaining in the labour force - earnings losses Figure 5: Earnings losses of men, 50-69, by education 5000 0-5000 -10000-15000 -20000-2 -1 0 1 2 Years since displacement Male - High Education Male - Low Education
Remaining in the labour force - earnings losses Figure 6: Earnings losses, 50-69, by rural-urban 4000 2000 0-2000 -4000-6000 -8000-10000 -12000-14000 -16000-2 -1 0 1 2 Years since displacement Rural Urban
Remaining in the labour force - Summary Remain in the labour force Long unemployment spells Large and persistent earnings losses Not substantially different across age groups Larger as a portion of income among lower educated, rural workers.
Retraining for a new career - Who undertakes formal education Table 3: Attending formal education programs TOTAL Currently working Not currently working and last worked: Less than a More than a year ago year ago Never All individuals 25-39 8.5% 6.1% 22.3% 15.3% 22.2% 40-55 3.0% 2.4% 7.9% 4.5% 7.6% 55-64 1.0% 0.9% 2.0% 0.9% 1.5% Males 25-39 7.5% 5.1% 23.2% 22.2% 31.1% 40-55 2.1% 1.6% 6.6% 4.8% 9.1% 55-64 0.7% 0.6% 1.6% 0.7% 2.8% Females 25-39 9.5% 7.3% 21.5% 12.8% 18.5% 40-55 3.9% 3.3% 9.1% 4.4% 7.1% 55-64 1.3% 1.3% 2.4% 1.1% 1.2%
Retraining for a new career - Who undertakes formal education Figure 7: Likelihood of studying 0.0% % pts less likely to be studying -2.0% Currently working -4.0% Out of work>1 year -6.0% Never worked -8.0% Out of work<1 year -10.0% -12.0% 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64
Retraining for a new career - Who undertakes formal education Figure 8: Likelihood of any training 0.6 Likelihood of taking a program or course, GIVEN income and age grp 0.5 0.4 0.3 0.2 0.1 0 Less than $5,000 $5,000 to less than $10,000 $10,000 to less than $15,000 $15,000 to less than $20,000 $20,000 to less than $30,000 $30,000 to less than $40,000 $40,000 to less than $50,000 $50,000 to less than $60,000 $60,000 to less than $80,000 $80,000 or more Age 25-34 Age 35-44 Age 45-54 Age 55-64
Retraining for a new career - the costs and benefits for displaced workers Table 4: Costs and Benefits of Training Individual characteristics Age 40 50 55 60 Tenure 6 16 21 26 Estimated cost of displacement Pre-displacement earnings 35,000 35,520 35,780 36,040 Post-displacement earnings 23,688 23,688 23,688 23,688 Years of working life left 25 15 10 5 Lifetime income lost 196,978 141,250 103,147 56,569 Estimated benefits of education Foregone earnings 17800 17800 17,800 17800 Cost 5000 5000 5,000 5000 Total cost 22800 22800 22,800 22800 Annual benefits ($) 2400 2400 2,400 2400 Discounted lifetime benefits 41,200 28,300 20,200 10,800 NPV (individual) 18,500 5,500-2,600-11,900 NPV (total, assume no externalities) 8,500-4,500-12,600-21,900 Assumptions Wages Earnings at age 35 35000 Return to tenure 52 Displacement cost 11000 Retirement age 65
Entering Retirement The retirement option Evidence of lower employment rates - Chan and Stevens (2001), Gray and Finnie (2007) Discouraged workers - Maestas and Li (2006) Poor prospects - Hirsch et al (2000)
Entering Retirement Characteristics of those who retire Relative to displaced workers who remain: Slightly older Less likely to have a pension Female Relative to workers who voluntarily retire: Slightly older Less educated Private sector, non-union Lower seniority
The policy response - background Policy Response Targeting displaced workers: Program for Older Worker Assistance (1986-1997) Employability Improvement Project (1991) Targeted Initiative for Older Workers (2006-7)
The policy response - is targeting older workers appropriate? Targeting displaced older workers Different options available - temporary income replacement vs. bridge to retirement Different policy interactions - public pensions Different time horizon
The policy response - is targeting older workers appropriate? Figure 9: Education levels, 1976-80 vs. 2001-6 70 70 60 50 25-40 year olds 55-65 year olds 60 50 25-40 year olds 55-65 yos 40 40 30 30 20 20 10 10 0 Less than HS HS Some PSE College University 0 Less than HS HS Some PSE College University
The policy response - challenges for policy design Reintegration into the labour market Education and training - will not compensate for lost earnings Potentially low interest among older workers Job search assistance and basic skills Reduce financial hardship Income support - tend to reduce labour force participation Wage subsidy or insurance schemes - may distort pre- and post-displacement choices Policy interactions Wage insurance - reduced public pension eligibility
Conclusions Concluding Remarks All displaced workers face large and persistent earnings losses. Older displaced workers - low participation in retraining, higher exit from labour force Policy options Potential for education and training limited Income support - incentive effects Evidence of policy effectiveness limited