Should older workers step aside?

During the past quarter century, we barely talked about whether we had enough jobs in America. With unemployment rates comfortably in the single digits there were plenty of jobs to go around. This world came to an abrupt end with the financial crisis in 2008, as the monthly unemployment rate spiked. It has since remained stubbornly high, and many of the jobs lost in the Great Recession have not come back. In response, some have suggested that older workers “step aside” as a way to free up jobs for younger workers.

Why are people singling out older workers? One reason is the sharp increase in the number of older Americans over the past decade, a product of the aging baby boomers. According to the Bureau of Labor Statistics, the number of people aged 65 and older in the labor force (i.e., working or looking for work) increased from 4.2 million in 2000 to 6.7 million in 2010. Over the same time period, the number of people aged 16 to 19 in the labor force declined from around 8.4 million to 5.9 million, largely because of increases in school enrollment. Some have interpreted these data and concluded that older workers are crowding out younger ones as they both compete for a scarce resource-jobs.

This logic is not flawed on the surface. For a given firm at a given point in time, if an older worker decides to retire, all else equal, the firm will need to hire someone to fill this slot. This hiring of a new worker starts a chain reaction as each new hire frees up their previous job for the next qualified person. The progression continues to the point where a position eventually opens up for the youngest and least experienced worker. In this “boxed-economy” view, there is a one-to-one relationship between new retirees and new jobs for younger workers.

The logic of the boxed economy breaks down when one looks beyond a single employer at a point in time. Economies grow. Jobs are constantly being lost and created, as outmoded ways of production make way for new ones. The transition can be a bumpy ride, but in the end society is better off as living standards rise. As economies grow, the demand for goods and services increases, which creates and supports new jobs. This is why, as Jonathan Gruber, Kevin Milligan, and David Wise have pointed out, the huge influx of women into the workforce in the post-World War II era did not lead to large increases in unemployment among men, as the boxed-economy view would have predicted.

Sadly, economies can also shrink, sometimes substantially, as we experienced during the recession; and they can grow very slowly, as seen in the first two quarters of 2011. When that happens, there may be lots of people competing for a fixed number of positions. But to choose younger workers over older workers as a solution to free up jobs is arbitrary and, at a minimum, unfair. It’s also a slippery slope–why not also require single workers to “step aside” so that those with children can work to support their families? And who decides?

Rather than go down this road, the focus should be on economic growth, which will lead to job creation. That’s the best way to ensure that everyone who wants a job can have one.

When we have solid economic growth, there are enough jobs for older workers and younger workers alike. During much of the 1990s and up until 2008, when the number of older workers was increasing, annual real GDP growth was strong, at 2 percent or more, and even exceeded 4 percent in several years. This growth generated more than enough jobs to sustain the influx of older workers. Annual rates of unemployment were 6.0 percent or less from 1995 through 2008 and even hit a low of 4.0 percent in 2000, a rate not seen since the late 1960s. Older workers were not displacing younger ones.

Another reason why asking older workers to “step aside” in the name of benefiting younger ones is that, ironically, younger generations would be strapped with the cost of financing the earlier retirements of older workers. The traditional three-legged stool of retirement income – Social Security, employer-provided pensions, and savings – is wobbly for most older Americans. Social Security faces a shortfall in its 75-year budget window and some form of revenue increases or benefit cuts will be necessary to maintain program solvency. Employer-provided pensions have experienced a dramatic shift over the past 30 years, away from traditional defined-benefit plans to defined-contribution plans, like 401(k)s, so older workers now bear the investment risk associated with their assets, which could be substantial in light of the recent volatility in financial markets. Finally, savings rates have been low for much of the past decade, despite a recent uptick.

Because of this wobbly three-legged stool, many older Americans either have to continue working, or will look to their children and extended family for financial support. Others will rely on social programs. The latter outcome is especially problematic given already-strained government budgets. Younger workers would then face higher tax rates to fund the shortfall. So younger workers will “pay” for the earlier retirements of older workers in one way or another.

How, then, do we address the fact that both older and younger workers need jobs now? Our advice is to see past the short term and avoid introducing a market distortion – asking older workers to “step aside” – that is premised on the number of jobs in the economy being fixed. Instead, we should acknowledge that as economies change, job opportunities change. The fact that older workers want to remain working longer is good news – for individuals, businesses, and society as a whole. The fact that younger workers want to work is also good news. Their work experience forms the foundation for the years ahead. The way to take advantage of both is to promote economic growth, not asking older workers to step aside.