Employer-Initiated Job Terminations

Abstract

Recent interest in pension reform and mandatory retirement has led to a considerable body of literature on job separation. The analysis has, however, focused primarily on the employee's reasons for, and reaction to, job separation. Much less attention has been paid to the theoretical factors influencing the employer's decision to terminate a person's employment.' Much of the debate centers on questions concerning the productivity of older workers. Representatives of the elderly not only argue that members of their constituency want to continue to work but that they are highly productive. The implication is that if employers terminate older workers it must reflect employer discrimination against equally productive but older workers. Becker [1], however argues that the case for discrimination is weak. Competitive markets would lead to nondiscriminating firms driving out the discriminatory firms. Furthermore, since employers will someday become old they are less likely to discriminate on the basis of age than other factors such as race or sex. The implication is that if older workers are being terminated this must reflect that their productivities have dropped below their wages. This paper explores the relationship between productivities and compensation paid by a nondiscriminatory employer who terminates older workers. The analysis yields answers to the following questions. At what point will a firm decide to terminate the employment of a person embodying the employer's investment in specific training? If productivities vary with age, how does the productivity of an older (terminated) worker compare with that of a younger worker? Have older workers passed their peak productivity years?