The Effect of Economic Conditions on the Employment of Workers Nearing Retirement Age

Till von Wachter

WP#2007-25

Abstract

The decline in employment of men near retirement age was concentrated between the early 1970s and 1980s, a period of dramatic shifts in the United States labor market. The paper begins to explore the effect of these shifts on retirement behavior. To do so, it analyzes the effect of changes in economic conditions at the individual, industry, and state level on employment of workers near retirement. Declines in labor demand reduce employment of older workers if their wages are rigid, possibly because of high replacement rates, habits, or implicit contracts. The paper gives a preliminary assessment of this potential mechanism by analyzing the response of relative employment of older and younger more and less educated workers to economic shocks. Preliminary results suggest that economic conditions are likely to have important effects on the employment of men near retirement age. However, the current evidence does not strongly suggest an explanation based on rigid wages or secular declines of economic conditions of low-skilled workers. An exception to this pattern is the manufacturing sector.