Gerontocracy in Motion? – European Cross-Country Evidence on the Labor Market Consequences of Population Ageing



Gerontocracy in Motion?

19


ment, keeping the age profile of wages stable despite high old-age unemploy-
ment is the more sustainable, the more generous is the system of unemploy-
ment support. Is wage rigidity indeed favoring older workers, additional sup-
port for these otherwise unsustainably high wages might be created artificially
by the state, in the form of early retirement programs, or by seniority rules re-
garding layoffs.

That is, the availability of programs designed to alleviate the unemployment
burden of workers being close to retirement - or, more precisely, the confi-
dence that a high unemployment rate of these workers will suffice to muster
enough political support for their creation - can be central to a bargaining
strategy that rewards their work disproportionately highly. Under such cir-
cumstances, employers and their associations will support this policy as well,
since early retirement programs can be used as an inexpensive work force
management tool. Moreover, bargaining every year over the percentage ad-
justment of the stable wage structure is much less complicated and costly than
calling its shape - i.e. the relative wages of young and old workers - into ques-
tion as well. The taxpayer, not the bargaining parties will pick up the bill for
maintaining a rigid seniority-wages relationship.

A stripped-down theoretical model embodying many of these ideas has been
developed in Schmidt (1993). In this setup, a monopoly union represents dif-
ferent age groups of workers whose relative prevalences vary over time. For
simplicity, think of labor supply at each age bracket as being inelastic, and con-
sider workers of different ages as imperfect substitutes in production, with the
structure of relative labor demand being stable over time. This implies, specifi-
cally that the only other production factor, capital, is not reflecting the type of
workers it is producing with. Rather, the only changes we concentrate on here
are the fluctuations of relative labor supplies.

If the monopoly union maximizes the wage bill, the wage of each age group
does not reflect its relative scarcity. What fluctuates over time, though, are the
(relative) (un-) employment rates of the different age groups of workers. As
this stylized model suggests, with unionized wage bargaining, (un-) employ-
ment rates might be affected more strongly by the relative shifts in labor sup-
ply associated with population ageing than wages. If the relative shift of labor
supply does
not translate (fully) into rising relative wages of younger workers,
their relative employment rates might rise and their relative unemployment
rates decrease while that of older workers might improve.

However, by contrast to the stylized model in Schmidt (1993), labor supply is
presumably not inelastic for all groups of workers. While this presumption
might approximate the labor market behavior of core-age workers quite accu-
rately, in times of high unemployment young workers can easily extend their
investment into education and older workers can exit the labor market into



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