Are Older Workers Crowding Out Younger Ones? Or Creating Jobs for Them?

By George Brown, SBAM Approved Partner ASE

The frigid temperatures of 2014 are an apt metaphor for the labor market that recent college grads are facing—very chilly. This is not a new story; nor is it new that a lot of people blame it on Baby Boomers who, for many reasons, refuse to retire and thereby make room for others. But are the Boomers actually the problem, or simply a too-obvious scapegoat for it?

Data collected by Gallup shows that the average age at which Americans say they will retire is now 61, the highest it has been in the 22 years the poll has been conducted. Since 2010 the age as polled has increased by two years. And as you might expect, this upward trend has been in place for the past two decades, with the probability of it continuing for years to come.

The argument is that there is less turnover than there used to be, which reduces opportunities for younger workers trying to get into the career pipeline. “The ‘gray society’ is creating a drag on markets and the economy,” Larry Fink, CEO of big money-management firm BlackRock, said in a recent speech. “The ‘gray society’ is restricting job opportunities for younger people as older people stay in the workforce longer.”

The economy has created nearly five million new jobs since the recession ended in 2009, with more than four million of them, on net, going to workers 55 and over. The unemployment rate among workers 55 and older is just 5.5%, while it’s 16.1% among 16- to 24-year-olds.

BlackRock estimates that every increase of three years in the average retirement age shifts 10 million jobs into older age brackets, effectively taking them away from younger workers.

This theory is known as the Lump of Labor. It is a 160-year old theory that still has many adherents. It is based on the Malthusian idea that there are only a finite number of jobs to go around. If one person holds a job, every unemployed person who could hold that job must remain unemployed.

April Yanyuan Wu, a research economist and Alicia Munnell, director of the Center for Retirement Research at Boston College and co-authors of “Are Aging Baby Boomers Squeezing Young Workers Out of Jobs?” have a different view.

In their study, Munnell and Wu tested for any changes in employment among those under 55 when those 55 and older worked in greater numbers. Their analysis draws on data from the Current Population Survey (CPS), which includes much detail about labor force participation, wages, salaries and other forms of income. It also includes robust demographic data. Munnell and Wu developed a mathematical model that demonstrated that for every 1% growth in the rate of older worker employment, youth unemployment went down by 0.11%.

In other words, Munnell’s and Wu’s analysis concludes that greater employment of older persons leads to better outcomes for the young – reduced unemployment, increased employment, and a higher wage. The patterns are consistent for both men and women and for groups with different levels of education.

The key to this argument is that that total number of available jobs is not fixed, as in the Lump of Labor theory, but dynamic. The more people who hold jobs, the more the economy expands, thus creating new jobs and putting more people to work.

In summary, those who believe that older people who hold onto their jobs longer are crowding younger people out of the workforce tend to be on-the-ground observers who see what is right in front of them. The problem they have, though, is that they tend to see only what is in front of them, not a bigger picture of a broader economy at work.

On the other hand, those who believe older people staying at work are actually helping younger people get into the workforce tend to be economists, i.e., people who study the issue at the macro level. Their problem is that their conclusions are based on theoretical models—they can never convince the frustrated job seeker that things are actually better than they look.

Which side of the argument are you on?