The Default Retirement Age and Lump of Labour Fallacy

Antony Mason tries to untangle the intergenerational outcome of the increasing number of retirement-age workers in the labour market

When the Default Retirement Age (DRA) was abandoned by government decree on 1 October, many commentators cheered from the sidelines.

The DRA was the age at which employers could enforce the retirement of its employees, typically 65. It was for long seen as an anomaly of employment equality law, and a legalised form of ageism. Indeed, the formal title of the scrapping of the DRA was called The Employment Equality (Repeal of Retirement Age Provisions) Regulations 2011.

Because of the contractual inflexibility of the DRA, perfectly healthy, loyal and respected members of staff were forced to retire prematurely (“consigned to the scrapheap,” is how Age UK put it). With longevity rates in the UK forever on the rise, this was set to become a growing injustice, and increasingly uneconomic.

The business world, however, was not universally in favour of scrapping the DRA. Some argued that the DRA allowed ageing members of staff to “leave with dignity” – and indeed it relieved them of the obligation to soldier on when they would actually like to retire. Many companies also pointed to the way that the DRA permitted them to revitalise their personnel to a planned programme: the recruitment and training of younger employees could be scheduled to match the predictable dates of retirement of senior members of staff.

Smaller businesses in particular expressed alarm. In the UK the average-sized business employs just four people: without a DRA to lay down the limits, it can be difficult, awkward and embarrassing to shed ageing staff who may be showing declining abilities but are reluctant to leave – perhaps because their retirement provisions are inadequate.

Now such businesses can enforce a retirement only through a tribunal system (with appeals), which is clearly going to be an uncomfortable experience for all concerned, and may require the Human Resources skills and funding that only large-scale businesses have.

By the way, companies and organisations can still set contractual retirement ages, but to do so they have to be able to justify this, and the criteria for such an “employer-justified retirement age” (EJRA) can no longer be age alone. Equally, although in principle they can no longer refuse to employ someone aged over 64 years and 6 months, they may be permitted to do so if they can justify the decision (such as the physical demands of the job, or the investment in training).

Taking jobs from the young

Another objection to the scrapping of the DRA comes from a different direction: that it keeps more older people in employment, to the detriment of young people trying get into the job market.

As some small businesses suggest, if older members of staff stay on longer, they cannot be replaced by younger workers, unless the business can afford to expand its workforce. It should of course be noted that older members of staff, coming to the end of their careers, tend to be earning far more that new recruits: it is possible to envisage circumstances in which the retirement of one senior member of staff permits a company to engage two or three new recruits.

In addition, companies that previously operated a DRA will now be free to engage new staff beyond retirement age – and so will be able to choose between older workers with experience and youth without experience. This may be a particular issue in hard times (as now), when people who had looked forward to retirement find they do not have sufficient means to live comfortably, and are forced back onto the job market – and may be happy to take up undemanding jobs that were once well below their pay-scale. This might be just the kind of employment formerly taken up by young people as entry-level jobs – such as shelf-stacking or checkout till-work in supermarkets and DIY stores.

Lump of labour fallacy

The fear that expanding the job market for older people will shrink the job market for the young is often brushed away as an example of the “lump of labour fallacy”.

It is deemed a fallacy because the total amount of work in an economy is not fixed, like a single great lump or block: employment is not a “zero-sum game”. Rather, it will expand if there are more workers contributing to the economy.

Since it was first introduced by the British statistician D.F. Schloss in 1891, the lump of labour fallacy has been used to dismiss a number of job market fears – including allowing increasing numbers of women into the workforce, and immigration. It has also been used to counter the argument that reducing working hours forcibly by government regulation will increase the number of people in work by spreading employment among more people – a stance vindicated by the much-derided “35-heures” policy introduced in 2000 by the government of Lionel Jospin inFrance.

Saga’s director-general, the economist Dr Ros Altmann, used this argument as a riposte to those who suggested that the end of the DRA would deprive younger people of the opportunity to find work: “If you have got more people working at any age they will have more money to spend and create jobs for more people… Everybody loses if you force people out of work, when it is a growing proportion of the population. If someone is still working, they are creating wealth somewhere in the economy.”

The Department of Business and Skills takes a similar line in its impact assessment of the phasing out the DRA, “Government Response to Consultation, January 2011”: “although there is a persistent assumption that older people in work ‘block’ younger people from finding work, evidence suggests this is incorrect. The number of jobs in the economy is not fixed, but depends on Government and private spending (when spending increases the number of jobs increases). Evidence suggests the employment rate of older people has little effect on the employment of younger people, and if anything a higher employment rate of older people tends to slightly increase the employment rate of younger people.”

It’s a convincing argument. Get more people working: they earn more, they spend more, they increase demand for goods and services – and jobs.

According to the National Institute of Economic and Social Research, for every year that the working life of employees is extended, the GDP of Britain expands by some £13 billion.

Anecdotal counter-evidence

The lump of labour fallacy argument looks particularly good from a distance. With hindsight it may be possible to say that, yes, the labour force expanded, the nation prospered.

But currently the British economy is expanding at a snail’s pace, if at all. Youth unemployment (for 18–24 year olds) stands at over 20% and rising. To a large extent, this is the outcome of the failure of the labour market to adapt to a post-industrial, highly mechanised and automated world, where many of the traditional low-skill, entry-level jobs have vanished.

So today, if businesses cling on to their older members of staff beyond the traditional retirement ages, and if at the same time entry-level jobs are taken up by older workers, this must surely affect the job prospects of the young.

It would seem that, where an economy is expanding, it may be appropriate to debunk the nay-sayers by citing the lump of labour fallacy. But where an economy is shrinking or static, the job market starts to look decidedly lumpy, and letting more people into the job market is unlikely, per se, to be a catalyst for growth

DRA: a storm in a teacup?

This discussion has been provoked by the scrapping of the DRA. But, as it turns out, only 30% of British companies and organisations were operating a DRA policy anyway, and when employees asked to work beyond the DRA, more than 80% of requests were granted.

For many years, most businesses have been using other management techniques (such as formal performance appraisal systems) to manage the late careers and retirement of their staff – and, if skilfully conducted, this process can be waved through by mutual consent and to mutual benefit. The Civil Service abandoned its DRA policy in 2010.

So in other words, forced retirements at the Default Retirement Age were rare, and by the same token the abolition of the DRA is only going to affect a relatively small number of individuals (perhaps 6000 in an over-65 workforce of 850,000) – and so is unlikely to have much impact on the economy as a whole.

As regards the lump of labour fallacy, having a few thousand additional older people in the workforce is not likely to affect overall employment one way or another.

The burning question is how to make the labour market expand by any means, instead of shrink, as it currently appears to be doing, to the great and long-term cost of young people. As Ed Miliband has put it, “Youth unemployment scars people for life, particularly if it is prolonged, and at today’s levels it will be costing the country millions of pounds a week. Our aim is to understand the problems we face, arrive at the right solutions, and then act. We must not let the scourge of unemployment leave a permanent mark on the hundreds of thousands of young people living through it today.”