Why Are Older Workers Working Longer?

 

One of the most significant repercussions of the economic downturn has been its effect on the labor market.  It goes without saying that too many Americans are out of work. And as you dig deeper into the data, it becomes evident that the age pattern of changes in labor force participation rates is different now than during past downturns.  

 

As the graph below shows, labor force participation rates have actually increased among those near and at traditional retirement. Since the end of 2007, labor force participation has increased by 1.4 percentage points among men above age 65 and even more among men ages 62-64, while it has decreased by about 1 percentage point among younger men. Simply, older workers are forgoing retirement and working longer.


 

This pattern is different from what was observed in recessions in the previous several decades. During the four recessions between 1970 and 2000, labor force participation rates among older men consistently decreased more than the participation of younger men. In the recession of the early 2000s, this trend reversed somewhat, but not to the same degree as during the current period.

 

Why is this happening? Three factors may be at play.

 

First, we may simply be observing a continuation of the trend towards later retirement that began in the early 1990s:
 

 

Labor force participation among older workers has been on the upswing over the past decade—reflecting a number of factors, including better heath, changes in kinds of work and work patterns, and shifts in employer pensions from defined benefit to defined contribution and a decline in employer-provided retiree health insurance.  These factors may be particularly important for the traditional "early retirement" group, ages 62-64.
 

Second, the current pattern could reflect declines in the value of retirement assets. With the shift away from defined benefit and towards defined contribution pensions like 401(k)s, changes in financial markets have a more direct effect on many workers’ retirement savings. With a smaller nest egg, older workers may thus have decided that they cannot yet afford to retire.
 

Finally, both the employment rate and the unemployment rate for workers over 65 have increased across the current downturn (this is in contrast to younger age cohorts, who have seen employment rates hold steady or decrease as unemployment has increased). This suggests that not only are older workers working longer, but some older workers are choosing to remain in the workforce through a period of unemployment and search for a new job—perhaps for the reasons discussed above—when older workers in the past may have transitioned out of the labor force. (Since the unemployed are counted as part of the labor force, the rise in the unemployment rate plays an important role in explaining the overall increase in labor force participation among older workers.)
 

Whatever the explanation, the bottom line is that we expect the overall unemployment rate to remain stubbornly high even if economic activity itself picks up steam. But the interesting differential between older and younger worker participation is one that merits a closer look – and may help us understand better how the labor market works.