Mon, Dec 12, 2011 - Page 9 News List

Policies to address euro crisis must balance generational needs

Most economists have rejected variations of the ‘lump-of-labor’ fallacy, saying there is no evidence that older workers are taking jobs from the younger generation

By Alan Wheatley  /  Reuters, LONDON

When Italian Welfare Minister Elsa Fornero shed tears in announcing an increase in the retirement age, people might have thought she was crying for a lost generation of European youth. Opinion polls show a strong perception that older workers deny young people jobs.

Fortunately for millions of young unemployed across Europe, economists say that perception is wrong, a variation of the fallacy that the amount of work is finite and jobs must be shared out accordingly.

If the “lump of labor” hypothesis was anything but a myth, why does the size of a country bear no relation to how many of its citizens have a job? Why have automation and computer processing not caused mass unemployment?

“Surely history tells us that there is no lump of labor” said Simon Kirby, a senior research fellow at the National Institute of Economic and Social Research, a think tank in London.

The supposition that delaying retirement is “taking jobs” from youngsters is in the headlines as one EU country after another, under pressure to reduce debts and deficits, cuts pension spending.

In the case of Italy, Fornero said on Sunday last week that pensions would be calculated from next year on the basis of paid-in contributions instead of end-of-career salaries.

The minimum retirement age goes up to from 60 to 62 for women and from 65 to 66 for men. Inflation indexation for those with monthly pensions of more than 936 euros (US$1,253) is scrapped.

Fornero wept at the sacrifices she was seeking.

“I won’t deny that there would probably be some increase in unemployment as a result of extended working lives, but that would just be a temporary factor as the labor market adjusts,” Kirby said.

Britain’s successful absorption of a large increase in the number of immigrants from Eastern Europe in recent years showed it was false to imagine that one group of individuals can find work only at the expense of others, Kirby said.

“That was a labor market shock. No one in the UK, particularly business, anticipated the scale of the increase in migration and yet we absorbed that reasonably well,” he said.

Mark Keese, head of the employment analysis division at the Organisation for Economic Co-operation and Development (OECD), a Paris forum of industrial democracies, also cited empirical evidence to debunk the theory.

Governments had tried in the past to reduce youth unemployment by enticing older workers to retire, but had failed, partly because they had to raise labor taxes to pay for the extended pensions. Employers were not amused.

“We have a good historical record showing it doesn’t work in one sense, so there’s no reason to think, in the other sense, that if you extend working lives it’s going to lock out younger people,” he said.

Indeed, Keese said there was no evidence that youngsters were faring particularly badly in this recession. Yes, youth unemployment was high — above 40 percent in Spain. However, fewer older workers had left the workforce during the downturn.

“So if the lump-of-labor fallacy were correct, the situation for youth would be much, much worse,” he said.

Keese said it was simplistic to view all jobs as the same. An older person has years of accumulated experience, often with valuable skills specific to a particular firm, that a youngster cannot match and an employer is loath to lose. A young worker might be more adept with information -technology, but probably lacks management skills.

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