Are extended unemployment benefits harmful to older workers?

Table of contents

Table of contents

List of figures

List of abbreviations

1 Introduction

2 Older workers - Retirement from employment
2.1 Retirement from employment - reasons
2.2 Unemployment benefits and extended benefits as incentive effects

3 Extended benefits and early retirement - long-term effects
3.1 Negative effects on older workers
3.2 Positive effects on older workers

4 Conclusion and Outlook

List of References

List of figures

Figure 1: Labour supply

Figure 2: Income development: Job search and unemployment benefit

List of abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1 Introduction

Retirement from the labour market takes place regularly on the basis of the statutory retirement age or on the basis of early retirement schemes. In addition, unemployment combined with low chances of continued employment in the labour market can lead older workers to take advantage of state social benefits or early retirement programmes. In the recent past, these programmes have been seen in many EU countries as an exit route from the labour market for older workers - usually from the age of 55 onwards - and as a soft entry route towards regular retirement. This was politically desired and promoted, for example, to create jobs for younger workers. If older workers leave the labour market prematurely and receive state social benefits over a longer period of time - e.g. in the form of unemployment benefits or extended unemployment benefits - this is associated with negative effects. According to the prevailing scientific opinion, ex­tended unemployment benefits promote the duration of unemployment as well as the duration until a new job is taken up. Moreover, the higher the unemployment benefit, the greater the probability that the individual will decide against a job offer on the labour market. Another spectrum of negative effects of early retirement programmes or extended unemployment bene­fits includes, especially for men, health consequences and a higher risk of mortality. The aim of this paper is to discuss the results of empirical studies focusing on the negative effects of early retirement programmes and to answer the research question: "Are extended unemploy­ment benefits harmful to older workers? ". For the sake of completeness, empirical studies are also presented that prove positive effects of early retirement programmes.

The course of the work begins with the definition of the term "older workers". The second chapter looks at the reasons that justify retirement from employment. In this context, the effect of unemployment benefits and extended unemployment benefits as incentive effects is dis­cussed. The third chapter then focuses on the long-term effects of extended unemployment ben­efits and early retirement, with the emphasis on negative aspects. Empirical studies on this topic form the basis for this. To complete the picture, empirical studies are discussed that demonstrate positive effects of extended unemployment benefits or early retirement programmes. In the last chapter, the thesis ends with a conclusion and an outlook.

2 Older workers - Retirement from employment

In the scientific literature, there is no universally valid definition of the term "older worker". The World Health Organisation (WHO) classifies the "aging worker" from the age of 45. The Organisation for Economic Co-operation and Development (OECD) refers to older workers as fit and healthy persons who are in the second half of their employment and have not yet reached retirement age. The scientific community sees the "aging worker" in an interval of 40 to 54 years - the same view is shared by the Institute for Employment Research. In science, however, "older workers" are considered to be employees from the age of 55.¹ The age cohort of employ­ees between 55 and 64 years of age is subject to the paradigm of early retirement in many OECD countries, although these employees can be classified as valuable knowledge carriers for an entrepreneur with regard to their professional experience.² Early retirement is systematically used as an instrument to relieve the labour market in phases of economic stagnation - combined with a noticeable increase in the number of unemployed.³ Regular retirement is based on legis­lation and is between the ages of 60 and 65 in most EU countries.⁴ Irrespective of the statutory retirement age, individuals often have room for manoeuvre in deciding on retirement (e.g. early retirement at the age of 63 resulting in a pension deduction or taking advantage of early retire­ment programmes), which marks the end of active employment. Thus, the retirement decision is an irreversible decision made within the framework of a legally defined age, which takes into account individual socio-economic and economic factors (including family status, assets, la­bour market, economic situation).⁵

In the first step, the chapter is dedicated to the reasons for early retirement of older workers. In a further step, extended benefits are discussed, which in the recent past in different EU countries offered a strong incentive effect to leave employment in the sense of an early retirement path. Moreover, based on the work-leisure model, it is shown that the higher the unemployment ben­efit, the more likely it is that the individual will decide against a job offer on the labour market. For the sake of completeness, the theory of job search is addressed, which illustrates that un­employment benefits provide individuals with a higher incentive to continue looking for em­ployment and a lower incentive to accept a job offer.

2.1 Retirement from employment - reasons

The reasons for early retirement are manifold. On the one hand, the statutory retirement age plays a role and, on the other hand, early retirement schemes that allow workers to leave the labour force early in industrialised countries. In some countries, an earlier retirement age is set based on certain occupations such as police, firefighters, military or civil service. Deterioration in health combined with illness also justifies retirement and results in disability benefits or long­term sickness benefits being drawn.⁶ Typical occupational diseases among older workers are cardiovascular diseases, mental stress or physical wear and tear (among other things as a result of stress or hard physical work), which lead to the loss of the ability to work.⁷ In addition to illness, there is also the possibility of becoming unemployed at an advanced age, so that state transfer benefits such as unemployment benefit are drawn. Older workers, whose chances of re-entering the labour market tend to be more difficult due to age, often use long-term unem­ployment benefits until the earliest possible retirement age. Research shows that of workers aged 55 who have been unemployed for two years, only 60% of men and 55% of women return to work. Looking at the OECD average, it is clear that the employment rate of the over-50s is less than half that of workers aged 25-49, for example.⁸ Looking at the employment rate of workers over 55 in many EU countries, it can be seen that it is noticeably lower compared to younger workers. The employment rate of older workers in the individual countries reveals a difference in employment ranging from 10% in Sweden to 30% in many Eastern European countries. In 2010, however, the EU target of an employment rate of 50% among older workers was set in Lisbon. Looking at Germany, this target has been achieved: In Germany, the em­ployment rate for people over 55 is now 74% and for women 63%. In the past, however, many countries and their governments have introduced early retirement schemes to reduce the supply of labour, even though life expectancy is increasing by about 2.5 years per decade.⁹ These were deliberate policies to combat youth unemployment on the assumption that jobs would be created by companies for younger workers. Companies used early retirement schemes on a broad basis as an instrument and as a subsidy by the state to rejuvenate or reduce the workforce. From the employer's point of view, this is done on the one hand for economic reasons, because wage costs increase for older workers with a simultaneous decrease in productivity, and on the other hand on the basis of the assumption that older workers are less able to adapt technologically and organisationally.¹⁰ Newer research findings on the performance and learning potential of older workers, however, provide a differentiated picture that puts the "deficit model of old age" - a decline in physical and physical performance capabilities - into perspective. Older workers develop selection, optimisation and compensation strategies to cope with the workload in eve­ryday employment. Nevertheless, the employment rate in companies for men aged 60 to 65 is just under 30 % and for women just under 13 % - alarmingly low figures in view of the shortage of skilled workers in the coming years.¹¹

Finally, the personal decision of older workers based on the option value of work plays a role for or against the decision to retire, as future income effects from work or pension are used as a benchmark. In this context, we speak of pull factors, which primarily include monetary effects and partnership constellations (e.g. family situation), and of so-called push factors, which in­clude the available labour supply of attractive employment opportunities or working condi- tions.¹² The push factors put more or less pressure on workers to end their employment early. Pull approaches are based on rational considerations of a worker to decide between work or retirement income at a given time. In this context, the individual optimises his or her labour supply depending on his or her realisable income and consumption preferences.¹³

2.2 Unemployment benefits and extended benefits as incentive effects

Compared to other regions of the world, the central feature of European states is a high level of welfare and social benefits, although these systems have been subject to permanent pressure to reform and change for years. State welfare policy includes the totality of all state benefits to cover social risks. In addition to social insurance, this includes pension insurance and unem­ployment insurance.¹⁴ In many EU states, employees who have paid contributions to unem­ployment insurance during their employment receive a state replacement benefit in the form of unemployment benefit in the event of unemployment. Often the entitlement to unemployment benefit is after a waiting period, which is intended to prevent the benefit from being claimed for a relatively short period of unemployment. This is intended to save costs within the social systems and at the same time minimise the administrative burden in connection with the appli­cation. The duration of unemployment benefits differs between countries. In Belgium, for ex­ample, unemployment benefit is paid for an unlimited period in the event of unemployment, while in Sweden, Iceland and the Netherlands the maximum duration is 3 years. Other countries such as the Czech Republic, the Slovak Republic or England have relatively short periods of unemployment benefit of about half a year. The amount of unemployment benefit also varies and can be between 50 and 90 per cent of the last income base, depending on the country.¹⁵ In addition to unemployment benefits, the state pays extended benefits to older unemployed peo­ple in many countries, including Finland. Eligible for these benefits are older long-term unem­ployed persons from the age of 55, with the age of access to extended benefits being gradually raised to 57 or 61. The special feature of extended benefits in Finland is that they are paid until the regular retirement age - on the one hand as a combination of regular and extended unem­ployment benefits and in the meantime in the form of an unemployment pension that followed the regular pension at 65.¹⁶ In Austria, extended benefit programmes were introduced against the backdrop of the steel crisis of the 1980s to protect primarily older workers from unfavour­able labour market conditions. For example, the duration of unemployment benefits for workers aged 50 and older with an otherwise continuous employment history was extended from 52 to 209 weeks. Older workers - women aged 50 and over and men aged 55 and over - were able to leave the labour force on the basis of extended benefits. As beneficiaries, they received 4 years of regular unemployment benefits and 1 year of further income support from the state, so that in total a transition to the regular pension was made possible from the age of 60 (men) or 55 (women).¹⁷

If we look at the general incentive effect of unemployment benefits, it becomes clear that the individual is faced with a changed decision-making situation with regard to work and leisure on the basis of the existing unemployment benefits. The starting point is the work-leisure model.

The labour supply is determined by the individual's utility function. The utility function is in turn dependent on the partial utility of labour income and time off work, with a decreasing marginal utility. The isoquant on which the function is based has a convex course to the origin, including a budget line that results from the maximum available free time and the maximum achievable wage. The labour supply is at the tangent point of the isoquant. If there is unemploy­ment insurance, then the income in the case of zero working hours or maximum free time is no longer zero, but rather the amount of unemployment benefits. Consequently, the individual's labour supply decreases the higher the unemployment benefit is. If the individual has a high preference for leisure time - the isoquant of the utility function is very steep - unemployment insurance can lead to the following effect: Withdrawal of the individual from the labour force, because the maximum utility is reached with a working time of zero and an income equal to the unemployment benefit.¹⁸ The higher the unemployment benefit, the more likely it is that the individual will decide against a job offer. The following figure 1 illustrates the overall context.

Figure 1: Labour supply

Schäfer, H., Reform der Arbeitslosenversicherung: Ökonomische Aspekte einer politischen Debatte, 2003, p. 8.

Abbildung in dieser Leseprobe nicht enthalten

The theory of job search offers another model for analysing the effect of unemployment on the behaviour of an unemployed and simultaneously job-seeking individual. Job offers are only accepted if the wage is higher than the unemployment benefit. If not, the search for work con­tinues. Opportunity costs are included in the calculation of the search. By accepting a job offer, the search is foregone in favour of a better job offer with a higher wage, and the unemployment benefit is also foregone. Let us assume that an unemployed person receives a job offer with a wage w1, where the straight line A indicates the cumulative earnings that are available when the offer is accepted. The alternative is to continue looking for work and wait for an offer with a wage w2 that is greater than w1. From time T onwards, income arises, which is illustrated in cumulative form by the straight line B. If the jobseeker is employed forever (t = unlimited), then there is a point in time S at which the cumulative earnings from later employment at the higher wage exceed the earnings from immediate employment. As a result, the waiting period is rewarded. If later returns are valued lower by the job seeker than current returns and if infinite employment is disregarded, the decision rule becomes clear: lines A and B have no intersection, which means that the further search for a better job offer is not worthwhile and the present job offer provides the maximum benefit for the individual. If the opportunity costs are then taken into account - which are present due to non-employment income - then this can be the lost leisure time due to taking up work or the lost unemployment benefits. Unemployment benefits influence the individual's decision-making process by reducing the opportunity costs of contin­uing to look for work, since income is available for the time spent looking for work. This is because with unemployment benefits, the point at which the cumulative returns to continuing to look for work reach the cumulative returns to taking up work immediately (S') is reached more quickly than without unemployment benefits (S). Thus, unemployment benefit has the following effect on the individual: There is a higher incentive effect to continue looking for work and a lower incentive effect to accept a job offer. Assuming a finite duration of employ­ment or job search, the following situation can arise: Without unemployment benefit, it is worth accepting a job offer, but if unemployment benefit exists, continuing the job search is more attractive. As a result, the extension of the search period can be equated as an effect with an extension of unemployment.¹⁹ From a purely economic point of view, unemployment benefits act as a subsidy to the individual's search - the jobseeker can extend his search time for work by choosing a higher reservation wage. Conclusion: unemployment benefits lead to higher un- employment.²⁰ This fact is also confirmed by studies from OECD countries - including Layard et al. (1991) - that countries with high unemployment benefits and longer benefit durations tend to have higher unemployment rates. This finding is also confirmed by the study by Lalive (2007), who examines the effects of small (13 weeks) and large (170 weeks) extended benefits in Austria. The results show that, among other things, large benefit extensions increase the du­ration of unemployment as well as the duration until taking up a new job.²¹ The following figure 2 illustrates the overall context.

[...]

¹ cf. Brandenburg, U., Domschke, J.-P., Die Zukunft sieht alt aus: Herausforderungen des demografischen Wan­dels für das Personalmanagement, 2007, p. 64.

² cf. Funk, L., Klös, H.-P., Seyda, S, Beschäftigungschancen für ältere Arbeitnehmer: Internationaler Vergleich und Handlungsempfehlungen, 2010, p. 13.

³ cf. Buchholz, S., Rinklake, A., Blossfeld, H.-P., Umkehr von Frühverrentung in Deutschland: Eine Längsschnittanalyse der Auswirkungen der jüngsten Rentenreformen auf den Zeitpunkt des Erwerbsaus­stiegs und die Rentenhöhe, 2013, p. 907.

⁴ cf. Statista Research Department, Eurostat; Deutsche Rentenversicherung, 2011, https://de.statista.com/statistik/daten/studie/173132/umfrage/renteneintrittsalter-in-europa/

⁵ cf. Arnds, P., Bonin, H., Frühverrentung in Deutschland: Ökonomische Anreize und institutionelle Strukturen, 2002, p. 2-3.

⁶ cf. Boeri, T., van Ours, J., The Economics of Imperfect Labor Markets, 2013, p. 155.

⁷ cf. Stork, J. , Widuckei, W., Betriebliches Alter(n)smanagement - sechs Spannungsfelder betrieblicher Praxis, 2018, p. 72-73.

⁸ cf. Boeri, T., van Ours, J., The Economics of Imperfect Labor Markets, 2013, p. 162-165.

⁹ cf. Jung, R., Voss, D., Erwerbstätigkeit von Älteren in fast allen EU-Ländern deutlich gestiegen, 2018, https://www.boeckler.de/de/pressemitteilungen-2675-erwerbstaetigkeit-von-aelteren-in-fast-allen-eu-la- endern-deutlich-gestiegen-3135.htm

¹⁰ cf. Boeri, T., van Ours, J., The Economics of Imperfect Labor Markets, 2013, p. 166-167.

¹¹ cf. Roth, C., Wegge, J., Schmidt, K.-H., Konsequenzen des demographischen Wandels für das Management von Humanressourcen, 2007, p. 99-101.

¹² cf. Boeri, T., van Ours, J., The Economics of Imperfect Labor Markets, 2013, p. 161.

¹³ cf. Seyfried, B., Weller, S., Arbeiten bis zum Schluss oder gehen vor der Zeit? - Forschungs- und Arbeitser­gebnisse aus dem Bundesinstitut für Berufsbildung, 2014, p. 3.

¹⁴ cf. Hegelich, S., Meyerp, H., Konflikt, Verhandlung, Sozialer Friede: Das deutsche Wohlfahrtssystem, in: Schubert, K., Hegelich, S., Bazant, U. (ed.), Europäische Wohlfahrtssysteme, 2008, p. 132.

¹⁵ cf. Boeri, T., van Ours, J., The Economics of Imperfect Labor Markets, 2013, p. 307-310.

¹⁶ cf. Kyyrä, T., Pesola, H., Long-Term Effects of Extended Unemployment Benefits for Older Workers, 2017, p. 1-6.

¹⁷ cf. Kuhn, A., Staubli, S., Wuellrich, J.-P., Zweimüller, J., Fatal Attraction? Extended Unemployment Benefits, Labor Force Exits, and Mortality, 2018, p. 1-8.

¹⁸ cf. Schäfer, H., Reform der Arbeitslosenversicherung: Ökonomische Aspekte einer politischen Debatte, 2003, p. 8-10.

¹⁹ cf. Schäfer, H., Reform der Arbeitslosenversicherung: Ökonomische Aspekte einer politischen Debatte, 2003, p. 10-13.

²⁰ cf. Schulze, S., Anreizwirkungen und Arbeitsmarkteffekte der Ausgestaltung einer Arbeitslosenversicherung, in: Hasse, R., Kruse, J., Schäfer, W., Straubhaar, T., Zimmermann, K.-W.(ed.), Schriften zur Wirtschaftstheorie und Wirtschaftspolitik, No. 32, 2004, p. 66-67.

²¹ cf. Lalive, R., Unemployment Benefits, Unemployment Duration, and Post-Unemployment Jobs: A Regression Discontinuity Approach, 2007, p. 111.