A Clash of Generations? Increase in Retirement Age and Labor Demand for Youth

Abstract

Most European countries experienced a dramatic increase in youth unemployment since the Great Recession of 2007-2009. For the Euro area as a whole, employment in the 15-24 age group declined by almost 17% over a 6 years span, in Southern Europe declines ranged between 34% (Italy) and 57% (Spain). Demographic and institutional developments cannot, by themselves, account for these dramatic changes in the structure of employment by age groups. This paper evaluates whether and to which extent the increase in the retirement age introduced in several countries in the middle of the recession could have contributed to divergent dynamics of employment rates at the two extremes of the age distribution. We take Italy as a case study as a major reform took place in December 2011 increasing the retirement by up to five years for some categories of workers. We have access to a unique dataset from the Italian social security administration (INPS) identifying in each private firm the fraction of workers hit by the increase in the retirement age. We look at the dynamics of youth hirings in the same firms as well as in firms where no workers were locked-in. Our results clearly indicate that before and after the reform, firms that were more exposed to the increase in employment duration of senior workers significantly reduced youth hirings. The results are also quantitatively sizeable. We estimate that a lock-in of five workers for one year reduces youth hiring of approximately one full time equivalent worker. Overall, out of a total loss of 150 thousand youth jobs, 36 thousand losses can be attributed to the reform. A variety of robustness tests confirm our findings.

Keywords: labor demand, lump-of-labor, Pension Reforms, youth unemployment

JEL Classification: H55, J0