Abstract

This paper shows that labor demand plays an important role in the labor market reactions of older women affected by pension deductions for early retirement. Based on a large representative sample of the German workforce (SIAB), we calculate the consequences of individual financial incentive changes caused by a pension reform in Germany on employment, unemployment, and partial retirement. The reform reduces financial incentives for early retirement. In line with labor demand theory, we show that employers with a high share of older worker inflow compared with the share of younger worker inflow, employers in sectors with a high share of collective bargaining agreements, and employers in sectors with few investments in research and development are more responsive to their employees´ demand to stay longer in the labor market. These employer groups mainly offer their older employees the option of staying longer in partial retirement instead of forcing them into unemployment before retirement.

Highlights

  • Labor demand and supply for older employees are not perfectly flexible, and the reaction of both market sides to labor supply shocks induced by policy measures should have an impact on labor market outcomes

  • We concentrate on the role of labor demand for the labor market effects of the 1992 pension reform in Germany, controlling for drivers of individual labor supply reactions, such as differences in financial incentives by birth cohort, social security wealth (SSW), and education, as well as age and cohort fixed effects

  • We show that the reform had the expected effects on the labor market behavior of affected older women; they strongly increased employment and, to a lesser extent, unemployment and partial retirement between the ERA and normal retirement age (NRA) to avoid pension deductions

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Summary

Introduction

We focus on the impact of labor demand on the labor market reactions of older women on a pension reform with an increase in labor supply. In line with previous studies, we show that pension deductions for early retirement increase the labor market attachment of older employees between ERA and NRA. Our empirical analysis shows that labor market effects of the reform depend on the type of employer the employee works for before retirement. The reaction of employers to changes in labor supply is not perfectly elastic and some employers use the options at their disposal to thwart the incentive effects of the pension reform aimed at longer employment of older employees.

Institutional background
Labor demand effects on the labor market for older employees
Estimation method
Average effects of the pension reform
Findings
The role of labor demand
Conclusions
Full Text
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