New study examines employment prospects of older workers

At a joint conference held in September 2003 to present the findings of a project entitled 'Proage - Facing the challenge of demographic change', the Confederation of German Employers’ Associations and the Bertelsmann Foundation concluded that Germany’s current problems related to the labour market and social security funding, and its weak economic growth performance, can be resolved only if greater use is made of the employment potential and experience of older workers. The two organisations have therefore called on policy-makers, the social partners and companies alike to change their thinking and give more employment opportunities to older workers by changing current policies and incentives.

On 25 September 2003, the Confederation of German Employers’ Associations (Bundesvereinigung der Deutschen Arbeitgeberverbände, BDA) and the Bertelsmann Foundation (Bertelsmann Stiftung) held a joint conference to present the findings of a project entitled 'Proage - Facing the challenge of demographic change'. The Proage project has examined questions relating to how older workers can be retained and promoted in work. The goal is to develop strategies to overcome imminent labour shortages that will arise because of demographic developments. Proage was founded jointly in autumn 2001 by BDA, the Bertelsmann Foundation, and three employers’ associations from Denmark, Ireland and the Netherlands.

At the start of the conference, Dieter Hundt, the president of BDA) called for reforms: 'In Germany, only about 38% of those aged between 55 and 64 worked in 2002. At the same time, early retirement burdens our social security system enormously – by EUR 37 billion in 2001 alone. We need to change this. We need to change direction towards more employment above all by making, in a decisive way, labour law more flexible, by an enabling labour market policy which improves incentives to work, by employment-promoting collective wage agreements as well as by a considerable reduction in non-wage labour costs. Moreover, we also require a pension system that creates incentives to remain in work longer.'

Stefan Empter, a member of the Bertelsmann Foundation executive board, noted the problems posed by demographic changes, and the way that some countries had tackled these problems: 'In particular, policy-makers, the social partners and companies are urgently required to understand – because demographic developments will mean that, in future, there will be ever fewer younger workers – that older workers are a prerequisite for economic success. An international comparison with countries that have successful employment policies shows that the trend towards early retirement is reversible. It is possible to increase employment amongst older workers without younger workers suffering as a result.'

At the conference a final comparative study from the project was launched. It was conducted by researchers at the Cologne Institute for Business Research (Institut der deutschen Wirtschaft Köln, IW) and the Institute for Labour Law and Labour Relations in the European Community at the University of Trier (Institut für Arbeitsrecht und Arbeitsbeziehungen der Europäischen Gemeinschaft an der Universität Trier, IAAEG). The aim is that the proposals in the report will contribute to the current intensive debate in Germany on the issues raised by an ageing society (DE0306104N, DE0305104F and DE0304103N). Some of the main findings are summarised below.

Effects of low employment rate

In Germany, only 37% of inhabitants between the ages of 55 and 64 (inclusive) were still in employment in 2001, compared with nearly 50% some 30 years ago. This is a considerably lower figure than the average for the same age group in Organisation for Economic Cooperation and Development (OECD), which stood at 48% in 2001. In Switzerland and Sweden, the rate was even higher at around 67% in 2001.

In Germany, use is thus not made of the economic potential of large and steadily increasing number of older people. According to the study, this is, not least, the result of a policy that, over the last two decades, has attempted to cushion in a socially acceptable way the labour market problems that have emerged as a result of a change in the structure of the economy caused by increased international competition. By making it easier for older workers to retire prematurely, it was believed that it would be possible to improve employment opportunities for younger workers. This policy has since been shown to be an ever more costly fallacy, the study argues.

The costs of early labour market exit do not just appear as heavy burdens on the social security system, but also in sizeable losses in the wealth created by the economy as a whole, according to the report. The total of the benefits paid to older workers without jobs (that is, those who are without work, but who are not classified as unemployed recipients of benefits), to those who have partially retired, and to early retirees before the regular retirement age of 65 for men, amounts to more than EUR 37 billion per year. This money must be provided by employees, their employers and, in part, by taxpayers. German economic growth and employment have deteriorated as a result of these practices. The estimated loss in wealth creation is also large, according to the study's estimates. Depending on the assumptions made - first, about the numbers of those aged between 55 and 64 who could be brought back into employment and, second, about their productivity - this loss in wealth creation has been estimated at between EUR 23 billion and EUR 184 billion per year.

If the social security system is not to be increasingly overburdened, and if the chances to achieve a higher rate of economic growth are not to be wasted, a rethink is necessary amongst everyone concerned, according to the study. This is even truer as it is possible to predict that demographic developments will mean that the workforce will, as a whole, get older. Whilst, at the moment, those aged between 35 and 44 make up, in absolute terms, the largest number of people in employment, in just 10 years’ time, it will be those aged between 45 and 54. At the same time, it will be more difficult to find younger workers for vacant positions, because the size of successive age cohorts will be smaller and smaller. Even immigration changes the picture only slightly.

A look at a selection of other countries shows that there must be a change in emphasis in the basic parameters of social policy and wage bargaining policy, the report argues. It is not just the advantages and disadvantages of a lengthier stay in employment compared with early retirement that depend decisively on these two policies, but also how the employment of older workers is viewed by companies.

Learning from abroad

Developments in many other countries prove that it is possible to achieve a higher rate of employment amongst older workers, according to the study. This is shown not only by countries such as Switzerland, the USA, Denmark and the UK that are, by international comparison, 'success stories', but also by countries such as the Netherlands and Finland that are, as the study outlines, currently pursuing policies in order to catch up. In the past, these two latter countries pursued, even more strongly than Germany, policies designed to encourage older people to leave the workforce for labour market policy reasons; however, they have clearly decided to turn their back on such goals. The study finds that such policy 'u-turns' that have manifestly led to increased employment rates amongst older people have not been at the expense of younger workers. Indeed, as in other countries that have successful employment policies, these countries have higher employment rates for older as well as younger people.

Even if, because every country pursues its own specific policy mix influenced by its own political and social characteristics, a simple recipe to increase employment amongst older workers cannot be devised from looking at successful countries, the fundamental conditions for success can still be discerned and considered as common characteristics. These conditions focus: on the one hand, on incentives for older workers to remain in employment instead of retiring, to a greater or lesser extent, a long time before the official retirement age; and, on the other, on incentives for companies either to recruit or retain older people in employment.

The study argues that the opportunities to retire and the possibilities to claim labour market policy-related benefits play a major role in influencing the supply of labour – that is, the decisions of individuals to seek employment. The incentives for individuals to remain in work until the official retirement age depend on a number of factors: the easier it is for people to take early retirement without having to accept, from an insurance point of view, sufficient ('actuarially fair') reductions in their pensions, the more generous invalidity-benefit provisions are, and the longer the time that unemployment benefits can be claimed as an 'income bridge' between employment and retirement, the more these incentives will be reduced. This is even truer in situations in which high taxes and social security contributions are deducted from wages and salaries, but not, to a large extent, from benefit payments.

On the labour demand side – that is, the decisions of firms to hire employees – direct and indirect labour costs together with age-specific social benefit regulations are found to have, among all of the variables examined in the study, the greatest influence. On the one hand, the willingness of firms to employ older workers is slight if employers think that the productivity of older workers is insufficient to cover their wages and the attendant non-wage labour costs. On the other hand, older people are often the first to be affected by workforce reductions; this happens to an even greater extent if it is possible for them to have to accept only relatively small reductions in their income because they can claim, in comparison with younger workers, either higher benefits or benefits of longer duration.

Looking at other countries, the report draws the conclusion that employment-hampering incentives may, not least, be provided by age-specific regulations relating to employment relations. One example of such 'wrong' incentives is wages that are, in part, determined by age. Another is the costs that arise, and that are anchored either in collective agreements or in law, when the duties of an employee change. In particular, these costs can arise, for example, as the result of: first, specific remuneration-guarantee regulations that protect against 'rationalisation' and downgrading; second, age-dependent redundancy legislation; and, finally, redundancy payments that increase with age. Conversely, measures designed to maintain the ability of people to work – whether by protecting people’s health or by promoting measures to increase skills and qualifications – influence in a positive way, as a rule, not only the supply of labour but also the demand for labour by those aged between 55 and 64.

To summarise the findings of the study's international comparisons, the points that distinguish countries with a high employment rate amongst older workers are, despite all the specific characteristics of individual countries, clear:

• first, pension systems that make early retirement less easy and less attractive from the perspective of individual workers and companies;

• second, regulations in the area of labour relations that offer sufficient room for manoeuvre for differing needs to adapt, on the labour market in general and at the firm level in particular; and

• third, investments in existing 'human capital' that do not stop when workers reach 40 years of age.

Recommendations to social partners

According to the study, different 'levers' must be pulled in wage bargaining policy in order to work against the trend for older workers to leave the workforce prematurely.

Remuneration and productivity must be brought into closer harmony. In order to achieve this, more leeway must be created in collective agreements for performance-related pay/benefits. The actual form that this will take must be determined at the firm level.

In addition, an important contribution towards adapting individual pay in an employment-enhancing way is a revision of the seniority provisions in collective agreements. Conversely, reductions in a number of regulations and practices must be made. The study calls for reductions in terms of: the 'ratcheting up' of pay according to age and the duration of employment with an employer; collective agreements providing for extended periods of notice as well as other restrictions if firms wish to make older workers redundant; and remuneration-protection clauses that amount to guarantees against downgrading for older workers even in cases of reduced productivity. Of course, such regulations are beneficial to older people when they are employed, but they hamper their reintegration into the workforce if they are made redundant.

On the other hand, efforts to protect the 'employability' of older workers by further vocational and professional training and by pre-emptive employment protection through such measures need to be enhanced, the report states. The task of determining the range and content of further vocational and professional training must remain within the purview of firms. Collective agreements can, in this respect, provide a framework that can be fleshed out at the firm level, the study suggests.

Commentary

From an economic perspective, changes must be made that influence the decisions of companies both to make redundant and to recruit older workers. Long-term effects will be attained only if a combination of policy adjustments is made by policy-makers, the social partners and firms.

The study makes clear, in particular, the need to reform the cost of labour, which, in Germany, is more strongly influenced by social contributions than it is in most other countries. The study recommends: first, that the efficacy of labour market policy should be improved; second, that labour market regulations should be reduced; and, third, that the social policy incentives to leave the workforce early should be decreased further.

However, if, as was once the case, the potential of older people is to be utilised nearly to the full, there must also be a change in the personnel policies of individual companies in the light of future demographic changes. Firms that, when competing for qualified workers in the future, do not want to lose out must, before too long, realise that successors will become harder to find and that social systems will no longer finance the early retirement of older workers. Examples of good practice by companies that have recognised the 'sign of the times' can also be found in Germany in increasing numbers. Such examples are published in a parallel study to that summarised above. (Lothar Funk, Cologne Institute for Business Research, IW)