New report argues growth in older workers’ wages may have held down wages during the recovery

David Kingman explains a recent report from professional services firm Ernst & Young which argues that the growing number of older workers has contributed to low wages during the economic recoveryOlder shopworker

The growing number of older workers who are choosing to postpone their retirements by remaining in the labour market for longer may be partly responsible for the decline in real wages during the economic recovery, according to a recent report from Ernst & Young.

Too many older workers?

The report argues that between the beginning of 2010 and the end of last year, over 90% of the additional 1.2 million workers added to the British labour market came from people aged 50 and over, who have chosen to delay retiring instead of leaving the workplace as early as they can, as members of previous cohorts tended to. Between 1998 and 2014 the average age of retirement has risen by almost 18 months (from 63.1 to 64.8) for a man and by nearly 3 years (from 60.6 to 63.2) for a woman.

Much of this can be explained by the push and pull of economics, as well as changes in the law and government policy. Workers have been encouraged to spend longer in the workplace by the gradual raising of the state pension age and the shift in anti-discrimination legislation which has made it virtually impossible for employers to have a compulsory retirement age. Economic factors have probably been even more significant, as many older workers are finding that they are not financially prepared for retirement because of low annuity rates and inadequate pension savings. Health and well-being have generally improved among older people as well over recent decades, so many workers are finding that they can cope with staying in the workplace for longer than members of previous generations were able to.

How has this caused lower wages? The report from Ernst & Young argues that Britain’s economy has behaved very strangely since the beginning of the recovery in late 2009: whereas recoveries are normally associated with rising wages because more companies are growing and competing to hire labour, instead real wages have fallen by 8% since 2007 – the largest continuous fall since records began in the 19th century. This is the main reason why, even though Britain has officially been out of recession for over five years, for many workers it still doesn’t feel like it.

Ernst & Young argues that part of the reason for this decline in real wages is that so many older workers are staying in work that growing firms still aren’t having to compete to hire more new employees. This effect is especially pronounced because older workers are more likely to be in senior positions on account of their skills and experience, so it is more expensive for companies to keep paying them, thereby reducing the funds available to reward younger workers closer to the bottom of the pay scale.

What impacts does this have?

The Ernst & Young report appears to argue that the impact of growing numbers of older workers is likely to be bad for younger people. Peter Spencer, the report’s author, says that “late retirement is having important economic and social effects. It holds back responsibility and remuneration for younger workers and holds back pay in professional and managerial jobs.”

He also suggests that it contributes to the “hollowing out” of the economy: the observed trend under which most employment growth has occurred in either high-paying graduate jobs at the top of the wage pyramid or low-paying, insecure service jobs at the bottom, with dwindling demand for the kind of jobs that used to exist between these two extremes.

However, this argument is always vulnerable to the accusation of accepting the “lump of labour fallacy”: the idea that the number of jobs in any job market is limited and inelastic, when in reality having more people in employment should create more demand for goods and services which will fuel the creation of more jobs.

Whether the report is right or not about the impacts of older people staying in work, it points to two truths which are indisputable. Firstly, that the number of older workers is going up, and should continue rising as the population ages; and secondly, that retirement can’t be postponed forever, and when the majority of the baby-boomers are too old to continue working the new and very real challenge of caring for them will begin.