In general, retirement is seen as a pure labor supply phenomenon, but firms can have strong incentives to send expensive older workers into retirement. Based on the seniority wage model developed by Lazear (1979), we discuss steep seniority wage profiles as incentives for firms to dismiss older workers before retirement. Conditional on individual retirement incentives, e.g., social security wealth or health status, the steepness of the wage profile will have different incentives for workers as compared to firms when it comes to the retirement date. Using an instrumental variable approach to account for selection of workers in our firms and for reverse causality, we find that firms with higher labor costs for older workers are associated with lower job exit age.
We project the labor force in the United States to 2060 and contrast the outcomes with comparative projections for Germany. In both countries, the population will age, but the demographic dynamics are fundamentally different. According to our dynamic microsimulations, the labor force in the U.S. will increase by 17 percent between 2020 and 2060 (about 29 million workers) despite population aging. In contrast, the labor force in Germany will decline by 11 percent (about 4.5 million workers). Our baseline projections indicate that an expansion of education will increase the labor force by about 3 million persons in the United States and about half a million persons in Germany by 2060. In several what-if scenarios, we examine the effects of further expanding education and of removing health barriers on labor force participation. Higher educational attainment among those with currently low education has the largest impact on labor force participation, relative to the additional years of schooling. However, health improvements and the labor market integration of people with health limitations suggest a larger increase in labor force participation rates. Using Sweden as a benchmark, we show that reducing the health participation gap would increase the U.S. labor force by as much as 13 million people in 2060 (+6.8 percent compared to our baseline).
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