Labor Market Rigidities and the Employment Behavior of Older Workers

Joint with: Tetyana Shvydko

The labor market is often asserted to be characterized by rigidities that make it difficult for older workers to carry out their desired trajectories from work to retirement. In this paper we address the following question: what is the association between the age composition of employment in an establishment and the propensity of older workers to separate from the establishment? In the absence of a direct measure of labor market rigidity, we use the share of older workers in an establishment's workforce as a proxy for the “older-worker-friendliness” of an establishment. We argue that establishments with a relatively large share of older workers, other things equal, are less likely to use technology or employment practices that result in labor market rigidities. As a result, older workers are more likely to be able to carry out their desired trajectory from work to retirement without separating from the firm. Our analysis uses longitudinal data on individuals from the U.S. Survey of Income and Program Participation merged with data on their employers from the Longitudinal Employer-Household Dynamics files. We use a difference-in-difference approach to analysis of the association between the age composition of employment in an establishment and the rate at which workers of different ages separate from the establishment. We find strong evidence that an older age structure of the work force at the establishment-level is associated with a lower separation propensity of its older workers, relative to the separation propensity of its younger workers. This finding is robust to many specification checks. These results provide indirect but suggestive evidence of the importance of labor market rigidities.

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