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

Mon, Dec 12, 2011 - Page 9

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.

“This is part of the lump-of-labor fallacy. You can’t just substitute a younger person for an older person. It really depends on the type of job,” he said.

PENSIONS BILL

In a demographic context, the policy emphasis on working longer is hard to dispute. In the 50 years since the OECD was founded in 1961, life expectancy has jumped by 10 years, to 76 for men and 82 for women.

Despite quite extensive changes in a clutch of countries to make pension systems financially sustainable, budgets are groaning under the strain.

Before the latest reforms, for example, Italy’s spending on pensions was 29.4 percent of government spending, up from 19.1 percent in 1990 and dwarfing the OECD average of 16.5 percent.

Charles Robertson, chief global economist at Renaissance Capital, said pension spending was a key cause of the eurozone crisis.

“To bring Italian pension spending down to German spending levels would require pension payments to be cut by a third. Given the 12 million Italian pensioners [roughly one-quarter of voters], it is little wonder that former [Italian] prime minister Silvio Berlusconi and his allies were so reluctant to address the pension issue,” he said in a report.

Delaying retirement to tackle unaffordable pension outlays might magnify youth unemployment in the eyes of voters, but economists take a more dispassionate view.

Creating jobs for youngsters comes down to giving employers incentives to hire young workers and reforming employment laws that protect “insiders” with permanent jobs at the expense of “outsiders” on precarious short-term contracts. These are often women and youths. Only one in five Italians under 25 has a job.

Above all, governments need to stimulate aggregate demand as well as raise the standards of education, training and skills.

“In many cases the qualifications that people acquire are just not fit for the skilled work that people want them to do,” said George Magnus, a senior economic adviser at UBS and author of a book on the economic consequences of ageing.

However, raising education levels is for the long haul. Generating jobs by boosting demand and output is the immediate imperative.

“The lump-of-labor argument is as meaningless today as it ever was,” Magnus said. “If we had more growth in the economy, I don’t think we’d be having a heated debate about oldies taking away jobs from young people.”