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Job fair attendees listen to a presentation on re-entering the workforce, June 11, 2013.
The Great Recession hit workers aged 55 or older particularly hard. At its peak in August 2010, the unemployment rate for this group reached 7.4 percent. This was a stark change from previous recessions, in which the unemployment rate for this group had been fairly modest relative to the rest of the population.1 In the 1990–92 recession, the unemployment rate among those 55 and older peaked at 5 percent, below the prerecession unemployment rate for the full working-age population. In the 2001–03 recession, the 55-plus unemployment rate never exceeded 4.3 percent. Between mid-2008 and the end of 2009, however, the 55-plus unemployment rate ballooned from 3.2 percent to 7.1 percent.
In this recession, older displaced workers found themselves in a harsher labor market and experienced longer jobless spells than cohorts who had lost their jobs during less severe recessions.2 A recent report by the US Congress Joint Economic Committee shows that the long-term unemployment rate (27 weeks or more) was 3.1 percent for those aged 55–64 and 3.3 percent for those aged 65 or older in 2012.3 This is marginally higher than the long-term unemployment rate for workers aged 35–54.4
Further, when we look at workers who have been displaced 52 weeks or more, the unemployment rate for those over the age of 55 is significantly higher than for workers at prime working ages. As per the same report, while the unemployment rate for these workers has come down in recent years, the share of older workers who are long-term unemployed is approximately 50 percent. As a proportion of long-term unemployed, those aged 55 and over represented 20 percent of the total.5 A paper from the Stanford Center on Poverty and Inequality notes that the percentage of workers 62 and older unemployed for more than a year quintupled in the four years following the start of the recession, reaching nearly 40 percent.6
The “scarring” effects of this job displacement are likely to continue to be felt for many years to come. Chan and Stevens show that late-career job loss has substantial effects on wages, assets, employment expectations, and actual employment.7Analyzing data from the Bureau of Labor Statistics, a Government Accountability Office (GAO) study found that older workers generally sustained greater earnings losses than younger workers, when comparing earnings before and after displacement. The median earnings replacement rate for workers aged 55–64 who were displaced between 2007 and 2009 was 85 percent, compared to 95 percent for workers aged 25–54 and more than 100 percent for workers aged 20–24. Further, a larger fraction of displaced older workers sustained earnings losses than prime-age workers.
These findings are similar to other studies. Johnson and Kawachi provide a descriptive analysis of job changes at older ages, showing that older job changers experience sharp reductions in earnings and loss of benefits.8 Motivated by the current crisis, Johnson and Mommaerts looked in detail at wage changes after unemployment. While men under 50 rehired after a spell of joblessness can expect to earn very nearly what they earned in their previous job, those over the age of 62 are faced with an average decline in wages of 35.6 percent.9
A recent paper investigated the longer-term financial effects of involuntary job loss for older workers and found that wage and wealth declines are persistent. After controlling for baseline socioeconomic status of displaced workers, older workers losing their jobs in mass layoffs have 14 to 19 percent lower earnings and 22 to 30 percent lower assets a decade later. They work for 8 to 10 fewer months over the next 10 years and are up to eight percentage points more likely to experience subsequent layoffs.10 These estimates are in line with earlier estimates that studied job displacement effects four years after job loss.11
Demand and Supply Mismatch
To more clearly understand the labor market older workers face, we examined nationally representative unemployment and demographic data from the Current Population Survey from May 2012 to April 2013. We tracked individuals over the course of that year and noted changes in their employment situation between their first and last months in the sample.
Of the individuals who started the survey unemployed, a similar percentage of older (55 and over) and younger workers (25–54) were still unemployed at the end of the sample period. But by the end of the sample period, a significantly higher percentage of younger workers had managed to find jobs (26 percent) and report full-time or voluntary part-time employment than of older workers (20 percent).
When we narrowed our analysis to only long-term unemployed workers (those who had been unemployed for 27 or more weeks), the gaps remained clear. Almost 16 percent of unemployed younger workers found jobs, compared to 10 percent of unemployed older workers. Though that six-percentage-point difference may seem small, it actually means that a younger long-term unemployed worker has a 60 percent better chance of getting rehired than an older one.
The unique incentives for older individuals to work are responsible for part of this gap. For example, older workers have a more pressing need for health insurance and to plan for retirement. In addition, older workers are likely to have high-cost items like mortgages or children’s living expenses. These obligations might motivate older workers to hold out for better jobs rather than accepting positions without health or retirement benefits, and they are also the precise reasons why it is so important that the older unemployed find jobs.
Employers are aware of older workers’ need for retirement benefits and health insurance, which puts them at a disadvantage. The GAO investigated the job market for older workers, finding that employers hesitate to hire older workers for fear of their higher health care costs.12 Employers also worry that older workers with a lot of work experience are more likely to demand higher salaries or leave even if they initially accept a lower-paying job. Additionally, they fear that their investment in hiring and training older workers may not pay off since older workers may not be willing to work much longer.
This creates a clear mismatch in the labor market for older unemployed workers. What older workers expect from a new job is very different from what employers are willing to provide. Laws exist that try to protect older workers from discriminatory hiring and firing processes. While these laws are effective during normal economic climates, recent research shows that they have exacerbated age discrimination during the current crisis. Indeed, the stronger the protections of a given state, the greater the adverse effects on older workers.13
If the traditional worker-protection approach is not appropriate in a weak labor market, another solution must be found. Unless specific policies are targeted to address the very unique challenges of older long-term unemployed workers, this problem will only continue to grow.
Policies to Help Displaced Older Workers
Fortunately, governments are not without policy instruments at their disposal to help smooth out inefficiencies in the labor market. Though it has used more limited forms of active labor market policies (ALMPs), the experience of other developed countries can help guide the United States. Research on a variety of programs has revealed a wide range of efficacy. Choosing the right method is the key to developing a solution to the persistent long-term unemployment among older workers.14
This paper considers five types of programs—training programs, three types of subsidy programs, and intensive job-placement programs:
Our research shows that an intensive job-placement program would be the most effective way to reduce long-term unemployment among older workers.
Training Programs. Studying the efficacy of training programs is difficult because it is hard to isolate the income and employment boosts caused by the training from boosts caused by motivation or selection systems. Failure to control for hidden influences can lead to overestimates of program effects.
Under many American training programs, administrators decide who participates in training, leading to biased results. Under the Jobs Training Partnership Act, for example, the performance of programs in various locales affects the amount of funding they receive. This creates an incentive to focus on people who would be likely to get a job and make more money even without training. Thus, when those in the trained group do better than their untrained counterparts, that would—at least in part—be indicative of the trained group’s a priori employability rather than their improved skills.16
Evidence from studies based on micro data generally indicates limited effects of training on job-finding rates. Macro studies, on the other hand, find that training is successful in reducing unemployment. Researchers have suggested that training may not significantly influence the job-finding rate, but, by improving the match between worker and job, reduce the rate at which workers lose jobs. In sum, this would cause micro studies to underestimate the positive, unemployment-reducing effects of job training.17
Though helping workers avoid losing their jobs is a positive outcome, older workers are already less likely to lose their jobs than younger workers. The main focus of a program for the older unemployed needs to be boosting the job-finding rate. This mismatch, taken with the general uncertainty about the efficacy of training programs, indicates that the older unemployed would likely be better served by a different approach.
Employer-Based Subsidies. Subsidy programs that reward employers for hiring certain types of workers have been well studied. The goal of these programs is simple: provide firms with incentives to hire workers from a group of people who otherwise could not find jobs. Temporary hiring subsidies, in particular, can have positive effects by causing firms to hire workers sooner in a recovery than they otherwise would—the precise purpose of a countercyclical employment policy.18 The question about employer-based subsidies, as for all subsidies, is how effectively they change the behavior of firms. Employer-based subsidies are vulnerable to several pitfalls.
The most severe problem is dead-weight loss. If a subsidy is implemented and a firm hires three workers instead of two but claims the subsidy for all three, the subsidy for hiring the two workers who would have been hired anyway represents a dead-weight loss. This loss is exactly what a program wants to avoid: spending money that does not change the behavior of firms.
Another key issue is the substitution effect, in which a subsidy causes a firm to hire a subsidized worker instead of an unsubsidized one. This is not necessarily a negative outcome; while a program would ideally boost total employment, the problem addressed here is a uniquely poor market for the older long-term unemployed. If the subsidy levels the playing field without boosting total employment, it should still be considered a success.
The research on employer-based hiring subsidies generally finds them effective in boosting target-group employment. One study in Germany found that wage subsidies to employers had positive effects on employment prospects for the hard-to-place workers enrolled in the program.19 Another German study found that wage subsidies led to higher employment rates in the subsidized groups.20 A review of about 140 European active labor market programs found such subsidies to be one of the most effective program types.21
Evidence from American programs confirms some of these findings. A study of the Work Opportunity Tax Credit and the Welfare-to-Work Tax Credit showed some evidence of short-term improvements but limited evidence of sustained benefits.22 Research on the Targeted Jobs Tax Credit found only modest positive employment effects for the target group.23
Although these subsidies tend to achieve the desired policy outcome, they may not do so at the lowest possible cost. Essentially, any study that specifically searches for dead-weight loss finds clear evidence of it, indicating how difficult it is to control such waste. In one instance, researchers studied two wage subsidies in Turkey, in which the second subsidy carefully incorporated lessons from the first to try to achieve the same policy goal without significant dead-weight loss. Even when feedback from the same type of subsidy was available to aid in designing a waste-free system, dead-weight loss remained significant, ranging from 27 to 46 percent.24 Studies reveal a sort of catch-22 in wage subsidy programs: increased controls could cut abuse, but they also decrease program participation, defeating the purpose of the subsidy.25
The labor-demand-boosting incentives of a hiring credit make it worth serious consideration, and the evidence does indeed show that employer-based subsidies have some positive effects. However, the implementation difficulties are imposing. Furthermore, the current market for older workers might reduce wage-subsidy efficacy, since the slack labor market is particularly prone to dead-weight loss. Wage subsidies clearly are a potential solution to persistent long-term unemployment among older workers, though an easier-to-implement program would be preferable.
Employee-Based Subsidies. Employee-based subsidies are widely and effectively used in the United States. We spent nearly $55 billion in 2012 on the Earned Income Tax Credit (EITC), an employee-based subsidy to lower-income workers that research has shown to be very successful in several ways. Most important, the EITC boosts employment.26 In tandem, it lifts income and labor market participation.27 Additionally, compared with employer-based subsidies, employee-based subsidies like the EITC are easy to implement. If we could expect an employee-based subsidy to older workers to deliver the same results, it would be an excellent policy choice.
A worker subsidy could be tailored to boost employment among the older long-term unemployed. For example, older unemployed workers appear less willing to accept part-time work for economic reasons, likely as a result of their desire to have a full-time job providing health care and retirement benefits. A subsidy that helps workers cover health care costs and retirement benefits might make them more willing to accept part-time and low-benefit job offerings. Though this could be problematic in a similar way to a basic income supplement—increasing demand for jobs without increasing the supply—it could also help make lesser-compensation positions viable employment options, presenting older unemployed workers with job possibilities more comparable to those of younger workers.
Overall, it might be possible to target an employee-based subsidy to the older long-term unemployed that positively affects their labor market conditions. Such a subsidy could be a component of a comprehensive plan to solve long-term unemployment among older workers but should not be used as a standalone solution.
Start-Up Subsidies. Starting a business lifts a worker out of unemployment, but the unemployed rarely have enough savings to fund a new business.28 Several countries have created programs that financially support unemployed entrepreneurs, and, in one case, provide some business classes as well. Studies of these programs indicate that such subsidies help workers exit unemployment and make more money.
One study found that a New Zealand program offering business skills training and financial aid decreased the time participants spent registered as unemployed.29 A study of two German start-up subsidy programs found unambiguous increases in employment probability and income that lasted throughout a 56-month observation period. At the end of the 56 months, workers were even happier with their new self-employment than they were in their previous jobs.30 Clearly, these are the extensively positive results any labor market program aims to obtain.
While old age may intuitively seem like a deterrent to entrepreneurship, according to an index released by the Ewing Marion Kauffman Foundation, individuals aged 55 to 64 consistently rank as one of the most likely age groups to engage in entrepreneurial activity.31 Reinforcing this finding, the Global Entrepreneurship Monitor found that workers 55 and older had increased their entrepreneurial activity during the first two years of the crisis.32 Therefore, this sort of program is absolutely worth keeping in mind to address employment difficulties in older cohorts.
Job-Placement Programs. Job-placement programs (sometimes called public employment services) help the target group by improving employability, overcoming placement deficits, placing employees into jobs, and stabilizing new employment relationships. These programs can be publicly administered by a government agency or offered by private organizations that receive payment for enrolling participants and finding jobs for them.
The evidence on these programs is very positive. The previously mentioned review of 140 European labor market programs that found clear positive benefits of wage subsidies found even stronger positive benefits of these services. Furthermore, when the review narrowed the sample to recent programs, the advantages stood out even more clearly.33 Since that review, researchers have continued to find clear positive effects from intensive job-placement services.34
Intensive job-finding programs are plainly a strong solution to long-term unemployment among older workers. Targeting them to the older long-term unemployed would be as simple as defining the workers that are eligible. Though application is never easy, other countries’ successes show that these programs are feasible. Additionally, flexibility between public and private provision allows for more implementation choices. A system allowing private companies to compete with a public program could allow for fine-tuning of incentives to achieve maximum private company effectiveness and use competition from the private sector to insure a high level of efficiency in the public organization.
The problem of long-term unemployment is particularly stark for older workers. These workers often have more significant health care and retirement planning, which handicaps their employment search at the same time as it heightens their need for a quality job. It is time for the government to intervene with carefully crafted policy to level the playing field for this disadvantaged and needy group of workers.
Our analysis of past labor market programs shows a number of options that could be implemented to help older workers, including training programs, employer-based subsidies, employee-based subsidies, start-up subsidies, and job-placement services. Of these, job-placement services, employee-based subsidies, and start-up subsidies are the most promising options to help the older long-term unemployed find jobs.
1. Matthew S. Rutledge, Natalia Orlova, and Anthony Webb, “How Will Older Workers Who Lose Their Jobs during the Great Recession Fare in the Long-Run?” (Chesnut Hill, MA: Center for Retirement Research at Boston College, March 2013).
2. A series of papers have documented the persistent “scarring” effects of job loss, both for workers in general and for older workers in particular. For the former, see Louis S. Jacobson, Robert J. LaLonde, and Daniel G. Sullivan, “Earning Losses of Displaced Workers” American Economic Review 83, no. 4 (September 1993): 685–709; and Joyce Manchester, Jae Song, and Till von Wachter, “Long-Term Earnings Losses Due to Mass Layoffs during the 1982 Recession: An Analysis Using U.S. Administrative Data from 1974 to 2004” (Washington, DC: Center for Economic Policy Research, 2007). For the latter, see Sewin Chan and Ann Huff Stevens, “Employment and Retirement Following a Late-Career Job Loss,” American Economic Review 89, no. 2 (May 1999): 211–16; and Courtney Coile and Phillip B. Levine, “That Market Crash and Mass Layoffs: How the Current Economic Crisis May Affect Retirement,” B.E. Journal of Economic Analysis & Policy 11, no. 1 (October 2011): article 22.
3. US Congress Joint Economic Committee, Long-Term Unemployment in the United States (Washington, DC: April 2013).
4. For 2013, by some estimates, the long-term unemployment rate for those aged 55–64 has decreased to 2.6 percent. See Heidi Shierholz, “Long-Term Unemployment Is Elevated across All Education, Age, Occupation, Industry, Gender, and Racial and Ethnic Groups” (Washington, DC: Economic Policy Institute, April 2014).
5. US Government Accountability Office, “Opportunities to Reduce Duplication, Overlap, and Fragmentation, Achieve Savings, and Enhance Revenue” (Washington, DC: GAO, 2012).
6. Richard W. Johnson, “Older Workers, Retirement, and the Great Recession” (Stanford, CA: Russell Sage Foundation and Stanford Center on Poverty and Inequality, October 2012).
7. Chan and Stevens, “Employment and Retirement Following a Late-Career Job Loss”; and Sewin Chan and Ann Huff Stevens, “Job Loss and Employment Patters of Older Workers,” Journal of Labor Economics 19, no. 2 (April 2001): 484–521. Chan and Stevens show that very little of the reduction in employment can be explained by pension incentives; see Sewin Chan and Ann Huff Stevens, “How Does Job Loss Affect the Timing of Retirement?,” B.E Journal of Economic Analysis & Policy 3, no. 1 (May 2004).
8. Richard W. Johnson and Janette Kawachi, “Job Changes at Older Ages: Effects on Wages, Benefits, and other Job Attributes” (Boston: Center for Retirement Research at Boston College, 2007).
9. Richard W. Johnson and Corina Mommaerts, “Age Differences in Job Loss, Job Search and Reemployment” (Washington, DC: Urban Institute, January 2011).
10. Rutledge, Orlova, and Webb, “How Will Older Workers?” Also see Onur Altindag, Lucie Schmidt, and Purvi Sevak, “The Great Recession, Older Workers with Disabilities, and Implications for Retirement Security” (Ann Arbor, MI: University of Michigan Institute for Social Research, Survey Research Center, November 2012).
11. Chan and Stevens, “Job Loss and Employment Patters of Older Workers”; and Manchester, Song, and von Wachter “Long-Term Earnings Losses Due to Mass Layoffs.”
12. “Unemployed Older Workers: Many Experience Challenges Regaining Employment and Face Reduced Retirement Security” (Washington, DC: US Government Accountability Office, April 2012).
13. Patrick Button and David Neumark, “Did Age Discrimination Protections Help Older Workers Weather the Great Recession?” (Irvine, CA: University of California, Irvine, Department of Economics, July 2013).
14. Jochen Kluve, “The Effectiveness of European Active Labor Market Programs,” Labour Economics (December 2010).
15. Jun Nie and Ethan Struby, “Would Active Labor Market Policies Help Combat High US Unemployment?” (Federal Reserve Bank of Kansas City, 2011).
16. Robert J. LaLonde, “The Promise of Public Sector-Sponsored Training Programs,” Journal of Economic Perspectives 9, no. 2 (Spring 1995): 149–68.
17. Jan Boone and Jan C. van Ours, “Effective Active Labor Market Policies” (Bonn, Germany: Institute for the Study of Labor, October 2004).
18. David Neumark, “Spurring Job Creation in Response to Severe Recessions: Reconsidering Hiring Credits” (Cambridge, MA: National Bureau of Economic Research, March 2011).
19. Ursula Jaenichen and Gesine Stephan, “The Effectiveness of Targeted Wage Subsidies for Hard-to-Place Workers,” Applied Economics 43, no. 10 (September 2009): 1209–25.
20. Gesine Stephan, “Employer Wage Subsidies and Wages in Germany: Empirical Evidence from Individual Data,” Zeitschrist fur Arbeitsmark Fourschung 43, no. 1 (February 2010): 53–71.
21. Kluve, “The Effectiveness of European Active Labor Market Programs.”
22. Sarah Hamersma, “The Effects of an Employer Subsidy on Employment Outcomes: A Study of the Work Opportunity and Welfare-to-Work Tax Credits,” Journal of Policy Analysis and Management 27, no. 3 (2008): 498–520.
23. Lawrence F. Katz, “Wage Subsidies for the Disadvantaged” (Cambridge, MA: National Bureau of Economic Research, July 1996).
24. Gordon Betcherman, N. Meltem Daysal, and Carmen Pages, “Do Employment Subsidies Work? Evidence from Regionally Targeted Subsidies in Turkey,” Labour Economics (August 2010).
25. David Grubb and John P. Martin, “What Works and for Whom: A Review of OECD Countries’ Experiences with Active Labour Market Policies” (Uppsala, Sweden: IFAU-Institute for Evaluation of Labour Market and Education Policy, September 2001).
26. David R. Francis, “The Earned Income Tax Credit Raises Employment” (Cambridge, MA: National Bureau of Economic Research, May 2014).
27. Stacy Dickert-Conlin and Douglas Holtz-Eakin, “Employee-Based versus Employer-Based Subsidies to Low-Wage Workers: A Public Finance Perspective” (Syracuse, NY: Center for Policy Research, March 1999).
28. While entrepreneurs with good ideas should be able to find funding in capital markets, empirical evidence suggests that having one’s own money to invest is very important to being able to start a business. See David S. Evans and Boyan Jovanovic, “An Estimated Model of Entrepreneurial Choice under Liquidity Constraints,” Journal of Political Economy 97, no. 4 (August 1989): 808–27.
29. Geoff Perry, “Are Business Start-Up Subsidies Effective for the Unemployed?: Evaluation of Enterprise Allowance” (working paper, Auckland University of Technology, 2006).
30. Marco Caliendo and Steffen Künn, “Start-Up Subsidies for the Unemployed: Long-Term Evidence and Effect Heterogeneity” (Bonn, Germany: Institute for the Study of Labor, February 2010).
31. Robert W. Fairlie, “Kauffman Index of Entrepreneurial Activity” (Kansas City, MO: Ewing Marion Kauffman Foundation, April 2013).
32. “Entrepreneurship and the Older Worker—Fact Sheet,” Sloan Center on Aging and Work at Boston College, February 2010, www.bc.edu/content/bc/research/agingandwork/archive_pubs/FS26.html.
33. Kluve, “The Effectiveness of European Active Labor Market Programs.”
34. L. Behaghelt, B. Cépont, and M. Gurgand, “Private and Public Provision of Counseling to Job-Seekers: Evidence from a Large Controlled Experiment” (Bonn, Germany: Institute for the Study of Labor, June 2012); and Gerhard Krug and Gesine Stephan, “Is the Contracting-Out of Intensive Placement Services More Effective than Provision by the PES? Evidence from a Randomized Field Experiment” (Bonn, Germany: Institute for the Study of Labor, May 2012).
The Great Recession has been particularly hard on older workers. Therefore, the government must intervene with carefully crafted policy to level the playing field for older workers. Job-placement services, employee-based subsidies, and start-up subsidies are the most promising options to help the older long-term unemployed find jobs.
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