Would Raising the Retirement Age Crowd Out Young Workers?

Oct 9, 2012 | Health Care| Social Security

One of the criticisms of raising the retirement age is the belief that older workers delaying retirement may "crowd out" younger workers and cause higher youth unemployment. This theory, also known as the "lump of labor theory," is challenged in a new paper by Alicia Munnell and April Wu of the Center for Retirement Research at Boston College.

Munnell and Wu study data from 1977 to 2011 and find no evidence of crowding out. In fact, the data suggest the opposite: there was a positive relationship between elderly employment and youth employment. This relationship was found after controlling for the strength of the economy (which would have youth and elderly employment rising and falling together in many cases).

Past studies have shown similar evidence seeming to disprove the "lump of labor theory," but none have studied the effect on youth wages. Similar to their findings on employment, the two economists also find a positive relationship between elderly labor participation and youth wages.

Even during the Great Recession, Munnell and Wu find that the positive association between elderly employment and young employment did not fade. This is critical because one might think that the large shock of the recession and the relative scarcity of job oepnings would in theory make the crowding out effect much stronger.

While this study does not specifically address raising retirement ages, it should help quell fears of crowding out effects for young workers if the ages are raised. Changes to the retirement age need to be phased in slowly and protect the most vulnerable, but there is enough to gain that the option should be considered. We have shown previously that it would improve both the economy and the budget.

The full paper can be found here.