Since the dawn of the industrial age, ensuring a good supply of jobs has been at the centre of political debate. The recurrent fear that new developments will reduce opportunities has frequently given rise to demands for labour protection. For instance, in the early days of industrialisation, automation was portrayed incorrectly as a threat leading to a permanent underclass of unemployed. More recently, the same worries arose with computerisation. And, yet, despite automation and computerisation, the world economy continued to create even more jobs as these processes lowered prices and boosted demand.
Similarly, whenever a new group of potential workers appears, the same worries re-emerge. Up to a few decades ago, women were seen as reducing opportunities for young men, with rules effectively forcing women out of the labour force when they married. In recent years, the rapid expansion of the female workforce and the economic growth this has generated have shown how baseless such worries were.
And, yet, the ageing transition is leading to similar worries. It is increasingly frequent to hear claims that retaining older workers reduces possibilities for youths.
Under this line of thinking, younger and older workers are engaged in a zero-sum game for a fixed number of jobs. Any job taken by an older worker means one less job for the young.
Luckily for us, the economic world works in a much more dynamic way. Economists, in fact, have for several decades disproved this ‘lump of labour fallacy’. In the words of Nobel Prize winner Paul Samuelson, “an economy can adjust to create jobs for willing workers”.
Rather than reducing the availability of jobs, economic studies have shown that retaining older workers brings higher economic growth, as their demand fuels even more jobs for the young.
International evidence is clear. Having a relatively low retirement age is no guarantee against high youth unemployment. The effective retirement age in France is 60, while the youth unemployment rate is 24 per cent. In Iceland, the effective retirement age is 67 and, yet the youth unemployment rate is 10 per cent.
What do Maltese labour market data tell us about the claim that older workers reduce opportunities for younger workers?
Over the last decade, the employment rate of those aged 50 plus has risen from 24 to 27 per cent. And yet the employment rate of those aged 15 to 24 also grew, from 45 to 47 per cent.
In fact, as in other economies, the employment rates of older and younger workers are positively correlated. They both rise and fall together. The rising numbers of older workers, if one were to believe the lump of labour fallacy, should have led to a rise in youth unemployment.
The Maltese data, like those in other countries, again show the exact opposite.
While the employment rate of older workers has risen from 45 to 47 per cent, the youth unemployment rate has fallen from 16 to 10 per cent over the last decade. The employment rate of older workers and the youth unemployment rate are negatively correlated. This means that when the employment rate of older workers rose, youth unemployment fell and vice versa.
The employment rates of older and younger workers are positively correlated
There are various reasons why the fear of older workers is as misplaced as that which in previous decades was associated with female workers.
First of all, a higher supply of labour makes our economy retain its competitiveness. This will be increasingly important when the size of our working age population starts to decline in the coming decades.
Secondly, older workers have a higher income than if they retire, thus creating more demand for goods and services and generating the need for more jobs to provide them.
Thirdly, older workers mean tax revenue instead of benefit spending, leading to lower deficits and reduced tax burdens, boosting economic growth.
Moreover, it is increasingly untrue in Malta’s fast-changing economy that younger and older workers compete for the same jobs. For instance, while 28 per cent of the workforce aged 50 plus is in public sector jobs, only 19 per cent of the younger workforce are employed there.
Conversely, while just 29 per cent of the older workforce is in retail and tourism-related activities, 38 per cent of the young workforce is thus employed.
Similarly, thrice as many youths tend to be employed in information and communication, compared to older workers.
Double as many older workers are in construction when compared to youths.
This difference in sectorial employment reflects the different education levels of young and older workers.
For instance, while 76 per cent of older workers have only completed up to secondary education, the proportion for young workers stands at just 35 per cent.
Younger workers do not need the ‘protection’ of having older workers retiring early.
Indeed, the economy is dynamic enough to create different jobs that cater for a diverse mix of competences that reward investment in education as well as experience.
Nobel Prize winner Paul Krugman argues that allowing the spread of the ‘lump of labour fallacy’ is dangerous for at least two reasons. Firstly, it “encourages fatalism”. If the public believes that new jobs cannot be created, they will stop pressuring our leaders to find more effective policies.
Secondly, it “leads to policy paralysis and encourages protectionism”, hurting economic dynamism. It is crucial to dispel such fears and instead face the challenge of our ageing society in a more positive manner.
Aaron Grech is head of the modelling and research department of the Central Bank of Malta.