Guide Older Displaced Workers in the Context of an Aging and Slowly Growing Population

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Among male workers with high seniority, prime-aged workers lose less in earnings than their younger counterparts, but this pattern is not found among women. In this study we provide updated estimates of the distribution of wage losses of displaced workers using the same approach.

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That US study was one of the first that measured wage losses appropriately, investigating wage outcomes of displaced workers over a time horizon spanning periods long before and long after layoff. Perhaps more importantly, the authors included in their analysis a comparison group of workers who had not been laid off to permit a comparison of their earnings outcomes with those of displaced workers with five or more years of tenure on the job. Their principal findings are that displaced workers actually experience relative wage losses before their final layoff and afterwards make only a partial recovery.

Another recent Canadian study is by Neill and Schirle , who estimate earnings losses of displaced workers between the ages of 50 and 69 using longitudinal data drawn from the Survey of Labour Income Dynamics SLID for the period Neill and Schirle include a rich set of control variables. Their estimates suggest that male workers of all ages suffer substantial and persistent losses in earnings after layoff, which is consistent with the existing literature as well as with the results that we report in this study.

Interestingly, these authors claim that the high losses that are statistically associated with age are more closely tied to tenure in the job. They also find that the impact of educational attainment on losses in earnings is not as strong as is typically thought. The objective of Chen and Morissette , which is based on the LWF, is to discern longterm trends over the period in postdisplacement labour-market outcomes for workers aged years at the time of layoff.

They detect no upward trend in the postdisplacement re-employment rates of male displaced workers in either the manufacturing sector or the nonmanufacturing sector, although reemployment rates for displaced women generally increased over time. They uncover substantial evidence that median and average earnings losses of males displaced from manufacturing over the period were higher than those of comparable cohorts laid off in the s, most of which they attribute to fewer hours worked as opposed to lower wages. Finally, they find that median and average earnings losses of females displaced from nonmanufacturing jobs fell over time.

A number of studies, most notably Picot, Lin, and Pyper and Morissette , deal with the incidence of layoffs in Canada in recent decades. Picot, Lin, and Pyper provide an overview of permanent layoffs in Canada between and They are interested in cyclical variations, potential time trends, and the association between layoffs and attributes of firms such as industry-level growth and firm size. They find that the probability that a worker was laid off during the s recession was no higher than during the s recession, with the exception of older workers. The permanent layoff rate was lower in the early s than in the early s, after the factors of sex, age, province, firm size and industry are controlled for.

These authors conclude that permanent layoffs have limited sensitivity to the business cycle, as the permanent layoff rate remains fairly high during recovery periods. Rather, permanent layoffs tend to be associated with idiosyncratic events occurring at the level of individual companies; most occur in small and medium-size firms.

Fluctuations in the aggregate permanent layoff rate can be attributed primarily to the evolving composition of firms within an industry or within the entire labour force, as opposed to global trends in the layoff rate. The study by Picot, Lin, and Pyper is updated by Morissette , who examines the evolution of permanent layoffs over the period for various demographic groups using the LWF database. Permanent layoff rates rose from to in large firms in the private sector but were stable for small firms having fewer than 20 employees. Temporary layoff rates did rise by at least half a percentage point for men older than 35 years, as well as for women aged years and years.

He bases this conjecture on a measured decline in hiring rates rather than any tracking of displaced workers following layoff. Riddell looks at consequences of layoffs on social welfare that go beyond the two economic outcomes that are typically measured — duration of joblessness and losses in earnings and wages.

He cites three studies. Sullivan and von Wachter determine on the basis of US data that experiencing a layoff causes a nontrivial decrease in life expectancy. Workers with larger losses in earnings tend to suffer greater increases in mortality. There are also adverse intergenerational effects. Using Canadian data, Coelli finds that the teenaged children of the affected worker are less likely to pursue post-secondary education. Oreopoulos, Page, and Huff-Stevens report that when children whose parents were previously laid off enter the labour force as adults, their earnings are approximately 9 percent lower than the control group.

This next generation also has a higher likelihood of receiving both EI benefits and social assistance. The findings from this literature can be summarized as follows. In nonrecessionary periods, the median duration of joblessness for displaced workers is approximately five to six months for men and seven to nine months for women. Previous length of job tenure tends to be an important factor in loss of earnings, especially for unionized workers; some of the earnings losses that appear to be due to age might actually be confounded with the effect of job tenure.

Long-tenured workers tend to experience high and persistent earnings losses that owe more to re-employment at wages substantially below their prelayoff levels than to unemployment. Prelayoff earnings tend to taper off before the point of permanent layoff. The empirical approach and methodology that we employ for this study are borrowed from Finnie and Irvine That study identifies individuals who have exhausted their EI benefits in a given year and examines their sources of income in subsequent years. In this study, we adapt that methodology by identifying prime-age and older workers with strong labour-force attachment who have suffered a layoff in a given year and by examining their income sources in subsequent years.

Labour-Force Participation of Older Displaced Workers in Canada

Once we apply our criteria with regard to filing status, age, self-employment status and labour-force attachment, only about 7 to 9 percent depending on the year of the sample remains approximately , individuals in , rising to , in We base our empirical analysis on this subsample. Our flag for the event of a layoff is the collection of regular EI benefits in that year. Thus, in order for an individual to be identified as laid off in our sample, the jobless spell following layoff had to last for at least three weeks owing to the two-week waiting period required to qualify for EI benefits.

As our data set contains no information on the employer, we cannot distinguish between a temporary layoff and a permanent one. Thus, workers expecting a recall and receiving EI benefits will enter our sample irrespective of whether these expectations are warranted or not. The first set of results that we report pertains to the sources of income that laid-off workers draw upon in the years following a job separation. For each cohort, which is identified by the year of separation, we compile the number of individuals receiving a given income source for each of the five subsequent years.

These subjects have many potential sources of income during any given year, and many if not most individuals have multiple sources of income. We elaborate a typology of income configurations that are prevalent and have labour-market significance and policy relevance. The central thrust is the following: What is the principal source of income for the worker after layoff? We are particularly interested in discovering how many subjects rely primarily on the labour market as opposed to retirement income.

For each type of income, we calculate the proportion of all laid-off workers in our sample who received it as their primary income source. For any subject-year observation for which there are only one or two sources of income, there must by definition be a principal source.

The second set of empirical results that we report measures changes in the employment earnings of laid-off workers in the years following layoff. The sample of laid-off workers is the same as the one from which the first set of results is derived. The losses in earnings are calculated relative to earnings in the last full year for which we observe prelayoff earnings. We note that this calculation will understate the losses in earnings as measured by the counterfactual that is, what the workers would have earned in a given year had they not been laid off.

The most important explanatory variable is age, which we divide into the following categories: Unlike most research in the literature, we include in our estimates workers nearing retirement age. In many studies, workers over 54 years of age are dropped from the sample in the interest of excluding outcomes related to retirement. In figure 1, we show the layoff rate over time by sex.

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The rate for women is slightly higher than it is for men. In the latest year in which layoffs are observed , 1.

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  7. Patterns for men and women contrast sharply in prior years. For men, the layoff rate declined from to in the context of strong economic growth and then returned to the level following the slowdown in economic growth in The layoff rate for women was significantly higher than that for men in but declined sharply through the rest of that decade and stayed relatively constant from to We acknowledge that the sample period is rather short and is dominated by the strong macroeconomic expansion that dominated the late s.

    These calculated values are much lower than the estimates of the permanent layoff rate that have been presented elsewhere in the Canadian literature, such as in Morissette This large discrepancy can be attributed to several factors. Second, his figures are based on data in which almost all layoffs, quits and dismissals that occur are reported. Other esearch has indicated that well over half of all laid-off workers do not file an EI claim and collect benefits within a two-month window. While we consider only those we deem to exhibit a high degree of attachment to the labour force, his sample includes many workers who are at the periphery of the labour force, exhibiting some form of nonstandard employment or low labour-force attachment, and who are thus more susceptible to being laid off.

    In figure 2, we show the average layoff rate by age group over the entire sample period. There is a strong pattern of rising layoff rates for older workers. The rate for men aged is almost double that for those aged 2. This runs somewhat counter to the notion that workers with longer tenure and hence likely to be older are more likely to avoid layoff when their firm downsizes.

    Data constraints do not allow us to examine recent trends in the layoff rate for older workers with strong labour-force attachment. Between and , the unemployment rate for all workers 45 years and older was slightly lower than that for their younger counterparts. Nevertheless, the proportion of all unemployed older workers who had been unemployed for more than a year was much higher than that of the younger group. In mid, almost 14 percent of all unemployed workers aged 45 and over had been unemployed for more than a year, almost double the rate for those aged This provides complementary evidence that laid-off older workers have a much more difficult time finding employment than their younger counterparts, particularly during recessions — even though long-term unemployment increases for both groups during recessions.

    The basis for our typology analysis is the likelihood of receiving income from a particular source in a given year following job loss. The 12 possible sources of income are grouped into four categories: The residual category includes very few individuals; in most years, it accounts for less than 1 percent of all laidoff workers.

    A subject is assigned a primary income source if that individual obtained more than 50 percent of his or her income from that source. The categories are constructed to be mutually exclusive and exhaustive, and thus their shares sum to percent. The results of the analysis are presented in tables 1 through 4, separated according to age group years and years and sex. The discussion that follows emphasizes comparisons between reliance on earnings and reliance on pensions, which are almost entirely private for workers below 60 years of age.

    Focusing our attention first on the group aged tables 1 and 2 , we see that in the five years following layoff, the large majority earned most of their income from the labour market. This should not be surprising, since all of the subjects were highly attached to the labour market before being laid off and they are much younger than the statutory retirement age. In the first year after layoff, By year 5, however, the share of workers relying on the labour market as their primary source of income falls below the previous minimum, reached in year 1.

    The corresponding shares for women are slightly lower but show the same general pattern.

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    Income from self-employment is small, although not inconsequential: Although these workers may have access to substantial savings or to a private pension attached to a high-paying prelayoff job , it seems more likely that they faced poor opportunities on the labour market. We shall return later to loss of earnings. Leaving the labour force in the wake of a layoff is much more prevalent in the age group tables 3 and 4. Not surprisingly, the proportion of men aged who rely on some form of pension income after layoff is far higher than that of their counterparts aged Note that for laid-off workers aged , in particular, the incidence of reliance on pension income rises over time for strictly mechanical reasons, as workers age and thus begin to qualify for public retirement benefits.

    Turning now to social insurance income, although a significant minority of workers does file at least one EI claim after the initial layoff, in any given year less than 2 percent of both age groups becomes dependent on EI as the primary source of income. Virtually none of the subjects who are older than 59 years do so.

    This finding is also true for other social insurance income. These findings regarding the CPP disability regime contrast sharply with trends in the United States. Black, Kermit, and Sanders and Autor and Duggan demonstrate that US disability regimes have evolved from their original function of insuring workers against loss of earnings attributable to a disabling medical event to providing long-term income support for the unemployable.

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    We find no such phenomenon in Canada, perhaps because the eligibility conditions for the Canadian program are extremely stringent. The workers in our sample are far more likely to be dependent on early retirement financed by either public pension schemes up to 20 percent of men aged and up to 28 percent of women aged or private pension schemes up to 39 percent of men aged and up to 37 percent of women aged Table 5 reports the values for the mean relative wage losses in reference to the level of earnings in the year before layoff experienced by displaced workers.

    The earnings losses are calculated for both sexes pooled together and reported for each of the five years after layoff. This implies that any worker without earnings for that year, whether that worker was unable to find employment or had withdrawn from the labour force, is not counted. For all age groups taken together, the mean earnings loss amounts to However, the loss decreases steadily to just There are sharp differences across age groups along two important dimensions.

    First, in the year immediately following layoff, the wage losses increase steadily by age. The smallest loss, This is consistent with the conjecture that the work experience of older laid-off workers is not easily transferable to potential job vacancies and that long tenure in the previous job may be a liability, limiting the ability of these workers to command high wages.

    It also may indicate that older workers are more likely to work part-time. The second striking finding is the evolution of postlayoff earnings over time by age group. At one extreme are individuals aged In addition to having the smallest average wage losses immediately following layoff, they see their incomes grow rapidly in subsequent years until they are actually earning slightly more in inflation-adjusted terms than they were before being laid off.

    The wage losses for those aged narrow to a negligible 4. This pattern is ubiquitous in the Canadian and US literature on displaced workers: It should be noted that because our estimates of losses in earnings pertain only to those laidoff workers who are able and willing to find a job, they are based on a selected sample. They do not capture the counterfactual earnings of those who withdraw from the labour market.

    As a result, the losses in earnings that we observe may not be indicative of the losses for the entire population of older laid-off workers. The direction of this potential bias is not clear a priori, however. On the one hand, it is possible that those with the least attractive labourmarket opportunities will withdraw shortly after being laid off. This selection effect associated with low potential earnings will cause us to underestimate the losses in earnings.

    On the other hand, one can imagine an income effect in the case of well-pensioned workers that could work in the opposite direction, if these are workers who forgo high potential wages. To our knowledge, the only study that attempts to assess the direction and magnitude of the bias is Schirle , which suggests that the degree of bias is not high, and that therefore researchers may be able to ignore the selection issue in calculating wage losses.

    In summary, the losses in earnings experienced by our sample of older displaced workers are large and persist for years after layoff. Will the effects be the same across regions, industries or occupations? How effective could different policy options be in offsetting the impact of population aging? What barriers are there to continued labour force participation by older workers that could be removed by policy action?

    What is the likely impact of workforce aging on firms and on their human resources management practices? How can policy facilitate adjustments and address unfavourable impacts? Do younger and older workers have different skills? Does workforce aging have important implications for productivity growth? How will population aging affect the capacity to innovate or to adapt? What will be the impact of population aging on human capital investment by youth? The sixth and final section indicates possible policy directions based on the research findings, and indicates areas for further research to support policy development.

    All of the developed economies are experiencing population and workforce aging as the result of decreased fertility and longer lifespans. Like the United States, Canada experienced high fertility during the post-war baby boom, followed by a low-fertility "baby bust. While Canada's population is younger than that of many other OECD countries, aging between now and will be more rapid in Canada than in most of these countries. The proportion of retirees in the population will grow rapidly, relative to the working-age population.

    This aspect of aging has implications for the fairness of Canada's public pension system and the sustainability of income security. These issues have been widely debated, in Canada and abroad. In past decades, rising educational levels among new labour force entrants have been an important source of growth in skills.

    As a consequence of the baby bust, Canadian-born labour force entry cohorts will be smaller, relative to the size of the workforce. Immigration will become a relatively more important source of entrants to the labour market, although Canadian-born school-leavers will continue to be the largest source of entrants.

    Labour is likely to become scarcer, relative to capital, leading to rising wages and increased employer perceptions of skill shortages. There also tends to be more skill acquisition among the younger workforce than the older workforce. This implies that the aging of the workforce may reduce growth in skills over the next several decades. Taken together, these trends will pose a challenge to Canada's ability to provide the increasingly skilled labour force required if Canada is to become a leading innovative economy and to improve its productivity performance.

    A reduction in the labour force growth may affect living standards, unless employment of older workers increases or productivity growth rises. An older labour force also implies an increased level of retirement. Firms or industries with a higher concentration of older workers may face substantial replacement costs. This suggests that population aging may impede the ability of the Canadian economy to adjust to structural changes or may increase the costs of such adjustments.

    Because older people consume different goods and services e.

    Labour-Force Participation of Older Displaced Workers in Canada

    Such a change in the consumption mix may significantly impact the sectoral composition of production and may consequently necessitate a shift of workers between industries. Economic models have become increasingly sophisticated, allowing policy analysts to explore the various consequences of changes in the characteristics of the population on the economy and the labour market. Assuming different scenarios, the authors present a series of demographic projections where trends in labour force participation are estimated along with the impact of population aging on productive capacity until In the "base case scenario", the total fertility rate, immigration, emigration and intensity of work remain at their current levels, while life expectancy, participation rates, educational attainment in the population and productivity are allowed to change following recent trends.

    The annual total factor productivity growth is assumed to be 0. The authors also present several alternative scenarios where fertility, immigration, labour force participation, education and productivity are assumed to be either lower or higher than in the base case. These assumptions are examined separately as well as simultaneously. Although these projections were performed for illustrative purposes, they provide some interesting findings for policy. Computable general equilibrium CGE models take into account the economy-wide effects of changes like population aging and the interactions of these effects.

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    SRI a estimate that:. The intensity and speed of the upcoming demographic change will differ markedly across the Canadian regions. Besides slower labour force growth, population aging will likely trigger changes in the demand of goods and services because of the specific needs and preferences of older consumers. The impacts of population aging could thus be different across industrial sectors and occupations.

    SRI also suggest that, despite changes in the relative importance of industrial sectors, wage pressures due to slower labour force growth will keep relative wage increases very similar across sectors. SRI a examine the potential impacts of alternative scenarios regarding immigration policy:.

    Recent experience suggests that it is not always the case that immigrants with a given level of educational credential can be readily substituted for Canadian-born persons with the same credential. Recently published results from the International Adult Literacy and Skills Survey show that immigrant workers with a university degree are far more likely to have low levels of English or French literacy skills than Canadian-born workers with a university degree. Immigrants' training abroad may not correspond exactly to Canadian training, requiring costly mechanisms of retraining or of credentials recognition.

    One potential downside of targeting highly skilled immigrants is that raising the supply of skilled workers in the economy could reduce the skill premium and the return to investment in education, potentially leading to lower levels of skill investment by Canadian youth. The average age of retirement was near 65 years during the s and early s and declined more or less steadily during the mids and s, reaching The trend toward early retirement is also noticeable in the labour force participation rate of older workers.

    Early retirement behaviour raises important public policy challenges as it implies reduced labour supply and output. Moreover, since population aging means more people in the older age groups, the negative effects on labour supply due to early retirement will intensify. They found that in the long run, the impact of working longer could be substantial in terms of extra labour supply and real output.

    First, the marginal effect of working one extra year would lead to a 3. Thus, if Canadians worked longer, this would result in a substantial increase in their living standards. What policy instruments might facilitate Canadians' choosing to remain at work? Research carried out for the SRI has investigated the impact of Canada's public pensions on the retirement decision of individuals and the various reasons for retiring voluntarily or involuntarily.

    SRI research also examined the implications of changes in the age structure and of workforce aging on labour market institutions and internal human resources management practices of firms, and the consequences for continued participation by older workers. The public retirement income system may affect a person's retirement decision through wealth effects and accrual effects. A wealth effect exists when public pensions increase a person's total lifetime income, leading the person to retire at an earlier age. Conversely, an accrual effect exists if the discounted present value of future pension income depends on the date of retirement.

    For example, if working an additional year decreases the discounted value of future pension benefits, a worker will have a strong incentive to retire now. Milligan and Schirle SRI examine how each of the four components 3 of the Canadian public retirement income system contributes to both wealth and accrual effects. They calculated income from each component for a "typical" individual and then compared differences in the incentives when private pension income, lifetime earnings and continuity of lifetime earnings vary.

    Their analysis shows that the Canadian retirement income system provides work disincentives, although they are small when compared with other industrialized countries. If each component taken separately influences the decision to retire to some extent, it is the interactions between them that provide some of the strongest incentives to retire. Given that GIS recipients represent the bottom third of the income distribution among individuals aged 65 and over, it appears that disincentives to work are strongest among low-income and presumably low-skill Canadian seniors, probably those who would benefit the most from working extra years to increase their retirement income.

    Milligan and Schirle also present simulations showing that the magnitude of work disincentives in the public system is sensitive to system parameters. However, removing work disincentives from this system may not be enough to significantly boost the labour force participation of older workers. Moreover, these work disincentives have to be balanced with the fact that the public retirement income system contributes to the reduction of poverty by providing to low-income seniors a significant portion of their retirement income. Public policy would therefore need to consider other policy options that may possibly involve employers and labour market institutions.

    Private pension plans also play a decisive role in the decision to retire. Employers can use features of their registered pension plans RPP s to encourage older workers to retire or, on the contrary, to retain them if they desire to do so. Moreover, employers could reduce the disincentives for those who postpone retirement. For example, RPP s may not actuarially adjust the pension benefits for those who remain past a certain age or a certain number of years of service.

    That being said, there may be limitations to what can be done to increase labour force participation of older workers through changes in RPP s. Gomez and Gunderson SRI b examine the near-to-long-term implications of changes in the age structure on workplace human resource practices. In their view, older workers are more likely to be well suited for their jobs in terms of skills and usually require less supervision. Compared with prime-age workers with family responsibilities, older workers, especially those aged 65 and over, are also less likely to look for a permanent job if not holding one , and they are more likely to choose non-standard employment e.

    Employers will need to adjust the way they manage their human resources, notably how they recruit and retain workers. More specifically, they may have to review their traditional seniority -based systems of promotion. When older workers represent a large part of the workforce, seniority-based systems of pay and promotion may become less desirable.

    However, given that workers are usually more reluctant about a system based only on performance and merit, employers should be careful when introducing such systems. Flexible work arrangements could be the most promising way to retain older workers or to incite retirees to re-enter the labour market. However, some features of public policies and programs may discourage such flexible work arrangements. Because of payroll tax ceilings, for example, offering shorter work hours or shorter work weeks to employees is more costly for employers.

    In terms of labour market institutions, Gomez and Gunderson SRI a, b argue that the elimination of mandatory retirement and age discrimination through legislation would obviously help employers to retain older workers. In jurisdictions that still have an age cap in their Human Rights Codes, the elimination of the age cap would ban mandatory retirement unless it was allowed in specific cases.

    When mandatory retirement is still allowed in a jurisdiction, its voluntary elimination may be an option to consider although this may have to be negotiated with unions if present. Elimination of mandatory retirement can be a voluntary solution designed to respond to specific firm needs. For instance, firms might be more likely to eliminate mandatory retirement when they foresee skill shortages. Although removing mandatory retirement would affect only a small number of older workers today, Gunderson and Gomez argue that the numbers will become larger, because future cohorts of older workers are likely to wish to remain longer in the labour force.

    Most of the policy options to remove work disincentives or retain older workers discussed above may increase the flexibility in the labour market and support the participation of older workers who wish to work longer. The effects of these policy changes are difficult to quantify but they generally target a small proportion of workers. American culture values younger workers, who are stereotyped as healthier, lower-paid and more technologically adept than older workers.

    When older workers lose their jobs, the impact on their health, finances and chances for new jobs is substantial. While employed older workers actually use less sick leave than younger workers, unemployment can seriously impact their health. Workers who lose their jobs during their late 50s or early 60s face shortened lifespans. They do not qualify for Social Security until age 62 and do not receive Medicare until they reach age Interestingly, workers who lost their jobs at age 62 did not experience a hit to their longevity.

    The researchers suggest that these workers obtain Social Security payments that help them pay medical bills. How Losses and Layoffs Affect Older Workers," predicted that the retirement rate for older workers will increase by 50 percent because of their widespread unemployment. A Congressional Research Service report, "Older Displaced Workers in the Context of an Aging and Slowly Growing Population," forecast that many older workers who would like to delay retirement will be forced to sign up for Food Stamps and other government assistance programs after their unemployment benefits end and their savings disappear.

    The Urban Institute analyzed outcomes for older workers who remain in the job market after losing their jobs.