How to help the older worker left behind in the recovery?

This article was originally published by the Globe and Mail on March 11th, 2011. To go to the the Globe and Mail website, please click here

While the economic recovery has succeeded in creating jobs and lowering the overall unemployment rate in Canada, the prospects for unemployed older workers remain bleak: Nearly 15 per cent of those 45 and over looking for work have been unemployed for more than a year, more than double the proportion of those under 45.

This is especially the case for those who worked for a long time at their previous job and have sector-specific skills that often are not easily transferable to other industries and occupations. When these workers suddenly find themselves laid off, they face considerable obstacles to re-employment. They rarely match their previous earnings when re-employed, and their earnings tend to stagnate in the following years – a situation that drives many to retire early.

In a study I recently co-wrote with Ross Finnie for the Institute for Research on Public Policy, we found that the trend of early retirement due to poor job prospects could both limit future economic growth and add to fiscal pressures on public and private pension plans.

Our research shows that about one-quarter of workers with long-term stable employment histories who are laid off between 45 and 59 (and hence not yet eligible for CPP retirement benefits) leave the work force for all practical purposes within five years. Among those 60 to 64, the proportion rises to nearly 70 per cent. These numbers are surprisingly high and are at odds with the expressed desire of many older Canadians to remain active in the labour market beyond the traditional retirement age.

Part of the reason for this disconnect is that older workers who do find employment typically see earnings losses of about 40 per cent relative to their previous job. This is particularly true for long-tenured workers, whose firm-specific experience and knowledge often do not command the same wages and salaries in the jobs available as they did in the job that was lost.

By contrast, younger unemployed workers have much better prospects. Those under 45 are more likely to find re-employment at or above their previous earnings. For those who do not, earnings growth over the five years following re-employment is typically sufficient to offset any initial earnings losses.

Canada has a poor track record of labour-market adjustment policies when it comes to assisting older laid-off workers. Substantial sums of money have been invested in training programs, but research generally shows little to no benefits for older workers in terms of improved employability or wages. The short-term income maintenance provided by regular EI benefits are helpful, but they often run out before older displaced workers succeed in finding a job, irrespective of whether the economy is in recession.

Subsidizing early retirement has been used in France to address the income needs of older displaced workers, but it would cost Canada more than $500-million a year to provide even a subsistence income for the 50,000 Canadians aged 45-plus who have been out of work for more than a year, let alone a more generous pension. But more important than the crippling fiscal cost is the fact that early retirement incentives are at odds with both the labour market needs of the economy and the desire of many older Canadians to remain engaged in professional life.

A more promising option that aligns well with keeping older Canadians in the labour force is a wage insurance program, which would subsidize a percentage of any wage loss experienced by an older unemployed worker for a fixed period of time once re-employed. This would directly address the “sticker shock” of accepting a lower-paying job that forces so many older workers from the labour market before they would like. To be effective, the program should be coupled with intensive job search assistance that encourages workers to look further afield than their previous industry and occupation.

If implemented properly, the program would allow older workers, who might otherwise be tempted to retire early, to earn acceptable wages and gain new work experience, partially counterbalancing the negative effect of population aging on Canada’s prospects for long-term economic growth.

David Gray, an economics professor at the University of Ottawa, is co-author (with Ross Finnie) of Labour Force Participation of Older Displaced Workers in Canada: Should I Stay or Should I Go?, published by the Institute for Research on Public Policy.

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