Working Paper: NBER ID: w2802
Authors: Edward P. Lazear
Abstract: Demographic changes in the labor force will imply that firms must change their labor policies in the coming decades. My estimates suggest that the labor force will get older and more female. The aging will not be as pronounced for males as for females because the trend toward early retirement among males will offset demographic changes. The size of the labor force will grow until around 2015 and then will decline. Given these changes, there are a number of issues that face employers. First, the aging workforce may mean an increase in the size of the firm's current deficit, defined as the difference between sales and labor cost. Second, under these circumstances, firms may do well to invest in assets that are highly correlated with the nominal wage bill liability. Short-term treasury bills are a good candidate, as is, paradoxically, putting pension assets back in the capital of the firm itself. This strategy can reduce the risk of bankruptcy. Third, explicit buyouts are the easiest way to reduce the size of the elderly workforce. But this will not help the individual firm's deficit problem. Fourth, declining ages of retirement among males can be reversed by changes in social security policy. A decline in real benefits and increase in the age of entitlement are likely to have the largest effects on raising the retirement age.
Keywords: Aging Labor Force; Labor Policies; Pension Plans
JEL Codes: J14; J26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Aging workforce (J26) | Increase in firm's current deficit (F32) |
| Changes in social security policy (H55) | Retirement ages among males (J26) |
| Aging workforce (J26) | Higher average wages due to age-earnings profiles (J31) |
| Higher average wages due to age-earnings profiles (J31) | Financial strain on firms (G32) |
| Aging workforce (J26) | Rising labor costs (J39) |
| Firms investing in assets like short-term treasury bills (G12) | Hedge against rising labor costs (J39) |
| Explicit buyouts (G34) | Reduction of elderly workforce (J26) |