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Why is Old Workers’ Labor Market more Volatile? Unemployment Fluctuations over the Life-Cycle

Jean-Olivier Hairault, François Langot, Thepthida Sopraseuth

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Deep economic recessions are marked by an increase in unemployment, which economic recovery promises to reduce. The 2008 recession was no exception. Usually, the general unemployment rate is the principal indicator, though commentators sometimes cite the specific rate of unemployment rate among youth or older people, which can differ from the general fluctuations. Where do these differences for age groups come from? Are they due to differences in employment policies or, on the contrary, are they intrinsic to the functioning of the labour market? To answer these questions in a context in which there are no age-related employment policies, Jean-Olivier Hairault, François Langot and Thepthida Sopraseuth studied American economic cycles, considering only temporary unemployment arising from imperfect information. Workers’ ages were introduced through generational modelling. In this context, it is crucial to analyse, on the one hand, when they were born, which tells us about their experiences in the labour market and the accumulation of human capital, and on the other hand, how far from retirement they are, which determines the horizons of firms’ and workers’ investments.
In this article, the authors use the CPS enquiry conducted in the United States between 1976 and 2010, which details the rate of shifts between employment and unemployment. First, they show that rates of falling into unemployment and of exit from it are more volatile for older workers than for those at other stages of their working lives. However, this volatility is relative: there are, on average, fewer job losses and creations for seniors. But seniors’ employment is, in the U.S., especially sensitive to prevailing conditions. Second, the authors explain the empirical rule by the effects of seniors’ “short horizons” when a classic model of employment research is used: statistically, when out of work, they are offered fewer job opportunities, which makes their salaries less elastic than those of other workers and as a consequence, reduces the potential leverage on profitability. Put another way, older workers’ short horizons increase the fluctuations in profitability of their employment. This result is also socially optimal because it is desirable to prioritise adjustments for workers the profitability of whose employment declines more than the value of their external opportunities.
Original title of the article: Why is Old Workers’ Labor Market more Volatile? Unemployment Fluctuations over the Life-Cycle
Publié dans: IZA Discussion Paper No. 8076 - Mars 2014
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