- Original article
- Open Access
Retirement rigidities and the gap between effective and desired labour supply by older workers
© The Author(s). 2018
- Received: 29 January 2018
- Accepted: 24 September 2018
- Published: 25 October 2018
Our paper analyses the observed and desired labour supply by older workers and (recent) retirees in a country (Italy) with limited opportunities for flexible work schedules. To this purpose, we use a dataset drawn from the Bank of Italy’s Survey on Household Income and Wealth providing information on desired and actual working hours. Our empirical analysis documents the gap between older individuals’ desired and observed labour supply at both the extensive and the intensive margins and traces it back to gender, education and family composition. The paper provides useful insights into the potential usefulness of policies such as gradual retirement and part-time work in increasing older workers’ employment.
- Desired labour supply
- Flexible retirement
Population ageing points to the need to increase the employment rate of older workers in order to guarantee both the sustainability of pension systems and the adequacy of resources in retirement. To achieve this goal, the main strategy of almost all European countries has consisted of increases in the statutory retirement age, the tightening of minimum requirements to access anticipated retirement and financial incentives to continue to work beyond the minimum (Eurofound 2016; European Commission 2015; OECD 2016). Although some countries (Italy among them) have established an automatic link between longevity and retirement age, the compulsory extension of working life is obviously not an ad libitum viable policy. This policy, moreover, reflects a rather traditional retirement scenario, typically characterised by full-time work ending abruptly in complete leisure. This pattern may not be what workers, or a significant proportion of them, want and may not necessarily serve firms’ interests either. Concerning the first, who are the focus of our study, harsh discontinuity between working life and retirement, when the latter suddenly reduces working hours from full-time to zero, can indeed be regarded as a welfare-decreasing factor. If rigidities in both the pension system and the labour market prevent individuals from doing part-time work, workers may feel constrained to retire earlier than they would have done. People may prefer retirement to full-time work, but they may be willing to continue to work if they have access to a reduced effort level. Evidence on stated preferences for gradual retirement in the USA, based on an internet survey in 2005, shows that 38% of respondents aged 50 and over show interest in participating in partial retirement schemes (Brown 2005). Kantarci and van Soest (2008) present similar results for the Netherlands, where about 55% of working men aged between 51 and 65 years stated an interest in working part-time. Technological change, on its part, seems more favourable to flexibility than traditional productive methods. Policy interventions designed to foster flexibility in working schedules and to increase the possibility of combining a pension and work, with some sort of gradual retirement, would then be welfare-improving, without curbing firms’ profitability.
Given workers’ heterogeneity, investigating the characteristics of the people who would be better off if they had access to a smoother scheme of retirement is the first step in designing appropriate policies. In this paper, we look at preferences for hours of work expressed by older individuals, whether in employment or already retired, and compare them to their effective working hours (which may be zero in the case of full retirement). The analysis gives us an estimate of the ‘discouraged’ labour supply that older workers could instead deliver, as well as a picture of the characteristics of workers willing to work longer. It also provides an empirical basis for measures at both government and HR management levels directed at encouraging workers to postpone their retirement instead of forcing them to work full-time.
The literature on the desired labour supply is limited, perhaps because of the shortage of individual survey data eliciting this information. Some notable exceptions are Callan et al. (2009), Euwals and van Soest (1999) and van Soest et al. (2002), who use data on the preferred labour supply—respectively in Ireland and the Netherlands—to estimate labour supply, wage elasticities and the impact of tax reforms. van Soest and Vonkova (2014) exploit stated preferences collected by the Dutch CentER Panel about different hypothetical retirement trajectories with different ages of (partial or full) retirement and different replacement rates. They use the information to estimate parameters of the utility function in order to simulate the sensitivity of retirement decisions to financial incentives, showing substantial differences between results based on observed or desired labour supply.
Our paper adds to the literature and to the policy debate by documenting the gap between the preferred and observed number of working hours, at both the extensive and the intensive margins. To this end, we exploit an ad hoc section of the 2004 wave of the Italian Survey on Household Income and Wealth to ascertain the desired labour supply of both older workers and retirees. Our data testify to a ‘displacement effect’, limiting older workers’ observed labour supply.
Descriptive evidence shows that a large majority of individuals aged 56–70 works the desired number of hours (85% of the sample). A non-negligible fraction of retirees, however, would like to work, most of them with a part-time schedule, and older workers declare that they are willing to continue to work, albeit with a lower intensity. The gap between the observed and desired labour supply is likely to depend on factors affecting the disutility of labour and the utility of additional resources. Our results confirm that gender, education and family composition are relevant factors associated with the desired labour supply. The comparison between the observed and the desired labour supply gives a measure of the severity of the displacement effect affecting older workers with respect to their level of work.
The paper is organised as follows. Section 2 provides an overview of part-time jobs and of rules for a more gradual retirement in Europe. Section 3 sketches the theoretical framework and Section 4 describes the institutional framework. Section 5 illustrates the data and the variables of interest. Section 6 comments on the empirical findings separately for retirees (Section 6.1) and for workers (Section 6.2). Section 7 concludes and discusses some policy implications of our results.
Incidence of part-timers across European countries (percentage points)
Part-time work at older ages can also be limited by legal restrictions to combine labour income and the cashing in of pension benefits. In extreme cases (which was the situation in Italy as well as in other European countries), official work after (anticipated or statutory) retirement age means a 100% taxation of pension benefits. In Italy, in particular, while the Defined Benefit formula to calculate the pension benefit effectively provided incentives to early retirement, the impossibility to work on a regular basis encouraged moonlight activities by older workers. In recent years, measures directed at supporting a more gradual retirement have often been advocated as a means to improve social welfare (without necessarily reducing the overall efficiency) by allowing workers to work (retire) more in accordance with their own preferences at older ages.
While gradual retirement on a large scale is still to come, various kinds of experiments have been carried out, generally consisting of the possibility of combining the accrued pension benefit (or a fraction of it) with work, either full- or part-time, and either with the same firm (phased withdrawal) or through a ‘bridge job’ with a new employer (partial retirement) (Brunello and Langella 2013; Kantarci and van Soest 2008). Various types of gradual retirement have been introduced and tested in different European countries, although the evidence regarding their success, in the sense of a consequent significant reduction of early withdrawals from labour matched by an increase in older workers’ employment rate, is quite modest (Delsen 1996). Highlighting the main reasons behind this lack of popularity is beyond the scope of this paper. It may derive from inadequate demand for part-time labour—indeed, a major issue in several European countries (Brunello and Langella 2013; Kantarci and van Soest 2008)1—from inadequate labour supply by older workers and/or from institutional constraints (pension and labour market regulations). Our purpose here is to look at the discrepancy between the actual and the desired labour supply for older workers as a prerequisite for the effectiveness of policies directed at incentivising the employment rate of older people.
Knowing the preferred number of hours of work, we are thus able to detect if, and to what extent, there is room for more flexible working schedules which could improve workers’ welfare. Our sample of interest is thus composed of people who are going to retire or have (recently) retired but would have preferred to stay at work under flexible working hours. Knowing the desired working hours and the actual working hours makes our analysis feasible.
The choice between protracting work and retiring depends on various economic and institutional variables, shaping the environment in which the decision is taken and having to do with regulations in both the labour market and the pension system. These include the pension formula, which characterises the economic pros and cons of the decision and take into account the opportunities/constraints characterising the working career. In the case of a Defined Contribution (DC) with actuarial adjustments, the continuation of work is not penalised and the worker can freely decide according to her personal preferences, possibly mitigated by firm issues, on the one hand, and health status plus family considerations, on the other (Coda Moscarola et al. 2016). When the formula is, instead, of the Defined Benefit (DB) type, favouring steep earning profiles and partly independent of the total amount of paid contributions, the continuation of work generates an implicit tax on the pension wealth, because the increase in the pension benefit does not totally compensate for the additional contributions and the loss of 1 year of pension benefits. This kind of disincentive can be enough to induce workers to withdraw as soon as possible. Another important feature comes from the possibility of combining work and pension. DB pensions are typically associated with stricter limitations on work with respect to the DC ones. In the case of retirement as a binary choice, the worker is either engaged full-time or is a full-time retiree. The DC formula makes the combination of work and pension much easier, and in variable ways, by reducing or canceling the penalty for continuing work.
Since our data concern Italy in year 2004, we briefly summarise the situation in what follows. Retirement could be accessed at a relatively young age through so-called seniority pensions, allowing workers to retire after a minimum of 35 years of service, almost irrespective of age, on condition they do not continue to work (or work part-time for the self-employed). With respect to paid contributions, benefits were relatively generous, and this somewhat justified the no-earning condition for an employee or the limit to the self-employed. Restrictions on earnings were imposed even in the case of the (very rare) DC pensions. No restriction was applied in case of retirement at the statutory age (so-called old age pensions) or for seniority longer than 40 years. This rather strict regime, usually motivated by the consideration of encouraging the substitution of old workers with the young ones (the ‘lump of labour fallacy’ at work) started to change in 2001 and was completed in 2009, when the cashing in of the pension benefit and earning income from work were made compatible.
Respondents who were not employed (unemployed, first job seekers, homemakers, retirees, etc.) reported whether they would be willing to work; if they answered ‘yes’, they were asked two additional questions:
At the same hourly earnings, how many hours would you like to work on average per week?
We use this information to construct an indicator of desired participation in the labour force (extensive margin) and to measure how many hours per week respondents would like to work (intensive margin). While it is clearly stated that wages for the hypothetical job are either current or market wages, the assumption that all other conditions (availability of child and elderly care, etc.) remain the same is implicit. In addition, nothing is explicitly stated about the possibility of gradual retirement, namely the possibility of combining part-time work with the cashing in of accrued pension benefits, nor about the value of future pension entitlements under different working choices (more specifically, whether the pension benefit will increase in accordance with an actuarially fair mechanism, or in a way that does not compensate for the additional contributions and the reduced retirement period, as implied by the then adopted DB formula). The assumption underlying our analysis is that respondents refer to the then current pension legislation which, as we have just seen, imposed restrictions on the possibility of combining labour income and retirement benefits. For the purpose of our analysis, we restrict our sample to individuals close to retirement age, namely those aged 55–70. Given that we want to focus on retirement choices as opposed to the continuation to work, we select individuals who are either still working or retired; we exclude from the sample those who are unemployed, homemakers and those on a different social insurance scheme (disability/survivor’s/social pension). It is worth noting that while this sample selection is not a major issue for male workers, because men in this age range either work or are in a pre-retirement scheme or are retired, more caution is required in the case of women, given their much lower participation rate (around 40%). After excluding from the sample cases in which the dependent variable has a missing value, we end up with 2670 observations, made up of 962 women and 1708 men. Figure 1 shows the distribution of workers and retirees by gender and age. In our sample, 77% of men and 87% of women are retired.5 The incidence of retirees obviously increases with age. This path is not linear, however, and we observe a sharp increase in the number of retired individuals around the typical retirement ages for private sector employees in 2004, which were 57 and 60 years, respectively, for women and men.
Considering the conditions generally obtainable nowadays, if [name] worked, given age, education and experience, would [name] be willing to accept: full-time payroll employment for the whole year/part-time payroll employment for the whole year/only occasional, seasonal or informal payroll employment/only freelance work or self-employment?
How many hours a week would [name] like to work in this hypothetical job?
No. children (in/out)
In this section, we document whether, and to what extent, the effective labour supply differs from the desired one at the extensive and intensive margins. The possibility of looking at desired hours versus actual hours of work is allowed by the unique feature of our dataset where each respondent was asked the desired number of working hours. As anticipated in the introduction, the general picture reveals that approximately 85% of the sample is satisfied with the actual time devoted to work.
We first illustrate the desired participation and working hours of retirees (Section 6.1). In Section 6.2, we focus on the subsample of older workers and analyse the extent of the gap between their preferred and observed labour supply. To investigate whether preferences among older and younger workers differ, we also illustrate the desired labour supply for younger workers.
Desired participation (probit), retired
No. children (in/out)
Type of job, retirees willing to work. Multinomial logit
No. children (in/out)
Desired working hours (Tobit), retired
Desired working hours, workers
No. children (in/out)
We use two samples (55–70 and 50–70, respectively) for the whole population and for men only. Men want to work more than women, a little more than 1.5 h. However, the extra hour worked causes an extra burden for just a little more than half an hour. Indeed only 0.4 h is desired for one extra hour of work observed for the older sample (55–70). When we include those aged between 50 and 55, we notice that people dislike less the extra hour worked (0.5 being the coefficient of observed hours versus 0.4 for the older sample in column 1). Focusing on men only, we notice that in some cases the male sample shows a more pronounced effect of significant coefficients such as being married. Married men would like to work two additional hours, highlighting the possible household head effect and family supporting role. The number of desired working hours turns out to be greater for less educated workers, private sector employees, married respondents and those living in northern regions.
Desired working hours, workers aged 31–50
This paper examines the observed and desired labour supply of Italian people close (on both sides) to retirement age and identifies the individuals who suffer a larger discrepancy of their effective labour supply in comparison to its preferred level. Our analysis shows that a somewhat relevant proportion of retirees (3% and 7% for women and men, respectively) would be willing to work. We distinguished between workers and retirees. As for the latter group, men are, on average, more willing to work than women. A college degree is associated with a higher desired labour supply, both at the extensive and at the intensive margins. Further, family composition affects the desired retirees’ labour supply, but differently for men and women and according to marital status. Married women would like to work less than those who are single, while men’s favourite participation in the labour market turns out to be higher when their wife is still working, in line with the complementarity hypothesis in the retirement decision of couples. Finally, retired men with children are more willing to work than men without offspring.
Turning to (older) workers, their favourite labour supply is, on average, smaller than the actual hours worked, indicating a preference for reduced labour activity. This result is consistent with a more general sentiment of lower desired hours of work, which emerges also for younger workers. Indeed, preference for working less hours dominates at any age among workers.
The evident discrepancy between the observed and desired labour supply suggests that labour and retirement policies do not accommodate the preferred working pattern of older individuals. However, while promoting flexibility in working trajectories at the end of the working life can improve the welfare of workers whose labour supply is constrained to be zero at retirement, the overall effect on the total working hours is less straightforward. Some workers who indicated a preference for part-time work would otherwise have retired completely, but others would have kept working full-time, the total effect on the labour supply depending on which of the two effects dominates. However, as pointed out by Kantarci and van Soest (2008), ‘previous studies that make the quantitative trade-off of the negative and positive labour supply effects unambiguously conclude that the positive effects dominate: creating more opportunities for gradual retirement can lead to an increase in total labour supply’. Along with an impact on the labour force participation of the older population, promoting flexibility in exiting the labour market has other effects. Firstly, it can increase job satisfaction and utility of workers at the end of their career by allowing them to work at an intensity that is closer to their preferred one. Secondly, gradual retirement schemes could prevent the use of alternative routes to exit the labour market, such as disability pensions or unemployment/redundancy schemes (like the so-called Cassa Integrazione Guadagni), which are costly and affect either the public or the private budget and still are, notwithstanding changes and reforms, particularly relevant in the Italian context.
It must be acknowledged that flexibility in the working schedule generally comes at a cost for employers, particularly where older workers are concerned, which could explain why gradual retirement and part-time jobs for older workers are less developed than looking just at the individuals’ labour supply would imply. This issue goes beyond the scope of our analysis; it is extensively discussed in Kantarci and van Soest (2008) and represents an interesting topic for future research.
Female labour supply, in particular, whose dynamic is strongly affected by fertility decisions and caring responsibilities (Battistin et al. 2015; Bratti et al. 2018), might be more responsive to a smoother decline in working hours to retirement.
For simplicity, we do not model directly DB pension formulas which are not actuarially fair and imply that increases in the pension benefit do not compensate the forgone year of retirement and the additional year of contributions (Castellino and Fornero 2001). Their implicit taxation of pension wealth in consequence of postponement of retirement can be thought of in terms of ‘unobservable’ affecting the utility of working.
We assume here that everyone retires in the next period (R + 1). This simplifying assumption does not alter the main message of our stylized framework.
If, instead, Vwpt > Vw > Vr, workers may decide to switch from a full-time to a part-time working schedule.
The sample consists of 2142 retirees and 528 workers.
Medium-level education captures respondents with a high school diploma; highly educated respondents are those with a degree or more. The reference category is low-level education (compulsory schooling).
One of the variables that could potentially explain less desire for work is health status, which is, however, not present in this wave of the SHIW.
The reduced number of retirees who would like to work and indicate their desired intensity suggests some caution is required in the interpretation of these results.
Sample size issues do not allow this equation to be estimated by gender.
This project has received funding from the European Union’s Horizon 2020 research and innovation programme under the Marie Sklodowska-Curie grant agreement no. 655770 (Trucchi). We thank Marco Disarò for research assistance with macro data. We would also like to thank the anonymous referee and the editor for the useful remarks.
Responsible editor: Juan F. Jimeno
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