The retirement age and the hiring of senior workers Labour Economics

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Labour Economics

journalhomepage:www.elsevier.com/locate/labeco

The retirement age and the hiring of senior workers ^☆

Trond Christian Vigtel

Ragnar Frisch Centre for Economic Research, Gaustadalleen 21, Oslo 0349, Norway

a r t i c le i n f o

JEL classification:

J14 J23 J26 Keywords:

Retirement Mobility Pension reform

a b s t r a ct

Thispaperexaminestheeffectofdecreasingthedistancetotheminimumlegalretirementageonthehiringof seniorworkers.Usingvariationbroughtaboutbyacomprehensiveold-agepublicpensionreforminNorwayin 2011,Iidentifyapositiveeffectonthehiringofseniorworkers.Theresultssuggestthattheincreasewasmainly causedbyapositiveshiftinthedemandfor“risky” seniorworkers(workerswithpriorsick-leaveandblue-collar workers).Thislendssupporttothenotionthatrisk-aversefirmsaremorewillingtohireseniorworkerswhen theminimumlegalretirementageisdecreased.

© 2018TheAuthor.PublishedbyElsevierB.V.

ThisisanopenaccessarticleundertheCCBY-NC-NDlicense.

(http://creativecommons.org/licenses/by-nc-nd/4.0/)

1. Introduction

Inlightofincreasedlongevityandtheneedtoextendworkinglives, reformsofold-agepublicpensionsystemsareontheagendaformany OECDcountries(OECD,2015).Inreformingthesesystems,policymak- erscan(somewhatsimplified)choosefromalimitedpolicymenucon- sistingof:(i)theflexibilityapproach,allowingforflexiblepensionbene- fitclaimingwhilealsostrengtheningtheincentivesforcontinuedwork, and(ii)theprescriptionapproach,increasingtheminimumlegalretire- mentage(LRA).¹ Themaincontributionofthispaperistoillustrate thatimplementingtheflexibilityapproachcanleadtoapositiveeffect onthedemandforseniorworkersthroughincreasedhiring.Toshow this,IconsideracomprehensivereformoftheNorwegianold-agepub- licpensionsystemin2011.TheNorwegianreformfollowedtheflexi- bilityapproach,andthepolicydiscontinuityinducedbyreducingthe minimumLRAfromage67toage62in privatesectorfirmswithout earlyretirementschemesallowsmetoidentifya(positive)causaleffect ofdecreasingthedistancetotheminimumLRAonthehiringofsenior workers.

Onepossibleexplanationwhydecreasingthedistance tothemin- imumLRAleadstoincreased hiringofsenior workersrelatestothe argumentmadebyLazear(1979).Anyfirmconsideringaseniorappli- canttoavacancymusttakeintoaccountboththeapplicant’sperceived

☆IthankSimenMarkussenandMoniquedeHaanfortheirconstantsupportandconstructivefeedbackthroughouttheproject,aswellasKnutRøedandErik Hernæsforvaluablecommentsonearlierdraftsofthispaper.Twoanonymousrefereesprovidedveryinsightfulandconstructivecomments.Theresearchhas receivedfinancialsupportfromtheNorwegianResearchCouncil(projectnameUnderstandingRetirementDecisions,grantnumber238-203).Datawasgenerously madeavailablebyStatisticsNorway,andhasbeenessentialforthisproject.Theviewsexpressedherearesolelyoftheauthor.

E-mailaddress:[email protected]

1 Bytheminimumlegalretirementage(LRA),Imeantheearliestageatwhich aseniorworkercanclaimold-agepublicpensionbenefitsconditionalonhaving sufficientindividualpensionbenefitaccrual.

currentproductivityandtheexpectedproductivityinthefuture.While thesetwofactorsmaybeaccuratelyprobedatthetimeofhire,there maybeahighdownsideriskthattheseniorworkerwillbesubjectto anegativeproductivityshockafterthetimeofhire.Thecombination ofstrictemployeeprotectionlegislationandthelimitedoutsidelabor marketopportunitiesforseniorworkersmeansthatthefirmmaythen beleft withan“expensive” workerintermsofthewage-productivity differential.Itis onlywhentheworkerqualifiesforpensionbenefits andcanwithdrawfromthelabormarketthatthefirmisrelievedofthis negativelock-ineffect.LoweringtheminimumLRA(asintheNorwe- gianreform)facilitatesfortheseniorworkertowithdrawfromthelabor marketearlierthanbefore.Assuch,reducingthedistancetothemini- mumLRAreducesthefirm’sexposuretothedownsideriskofhiringa seniorworkerandcouldthereforeincreaseitspropensitytohiresenior workers.Inaddition,wewouldexpectthatloweringtheminimumLRA wouldaffectdifferentgroupsofseniorworkersdifferentlyaccordingto theriskassociatedwithhiringthem.Atthesametime,thelowering oftheminimumLRAintheNorwegianreformwasaccompaniedbyan actuarialadjustmentofpensionbenefits.Thismeansthatwhilethere wasnowapossibilityforworkerstoretireearlierthanbefore(e.g.due toanegativehealthshock),therewerenochangesintheeconomicin- centivestodoso.Forthehiringfirm,thereformthereforereducedthe riskofanegativelock-ineffectwhilekeepingtheexpectedlengthofthe employmentrelationshipthesame.

https://doi.org/10.1016/j.labeco.2018.01.004

Received 18 April 2017; Received in revised form 9 December 2017; Accepted 26 January 2018 Available online 1 February 2018

0927-5371/© 2018 The Author. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license. ( http://creativecommons.org/licenses/by-nc-nd/4.0/ )

Theestimationresultsaccordwellwiththisstory.Adifference-in- differenceapproachindicatesthatthereformincreasedtheprobabil- ityofprivatesectorfirmshiringaseniorworker(definedasaworker aged50to61atthetimeofhire)by0.81percentagepointsor16.3%

(100× (0.0081∕0.0497)=16.3).Estimationsusingage-specificdifference- in-differencespecificationsshow aclearage-differentialeffectonthe probabilityofanewseniorhire,withtheeffectbeinglowerforhigher ages.Inlightofthis,Iexploitthereform-induceddiscontinuityinthe distancetotheminimumLRAinordertoassesstheeffectofdecreasing thedistancetotheminimum LRA.Usingalinearprobability model, the results indicate that a one-year decrease in the distance tothe minimumLRAincreasestheprobabilityofanewseniorhireby4.2%

(100× (0.0021∕0.0497)=4.2).Furthermore,theincreasein probability ofanewseniorhireisconcentratedontheextensivemargin(withthe firm going from no senior hireto onesenior hire). Toexamine the mechanismbehindtheseresults,Iconsidertheeffectonseniorwork- erswith apriorhistoryof sick-leaveandblue-collarseniorworkers.

Thesearetwoworkercharacteristicsthatmayindicatetheriskofhir- ingforthefirm.Restrictingattentiontoseniorworkerswith aprior historyofsick-leave,theeffectofdecreasingthedistancetothemini- mumLRAbyoneyearincreasestheprobabilityofanewseniorhireby 4.6%(100× (0.0011∕0.0234)=4.6).Forblue-collarseniorworkers,the effectis7.4%(100× (0.0015∕0.0201)=7.4).Inshort,theincreaseinthe hiringofseniorworkersfromdecreasingthedistancetotheminimum LRAismainlydrivenbyfirmsbeingmorewillingtohire“risky” senior workersthanbefore,aswewouldexpectfromtheargumentmadeby Lazear(1979).

Astraditionalpay-as-you-gopublicpensionsystemsarereformed, increasingtheminimumLRAisconsideredaneffectivepolicymeasure tolengthenworkinglives.Theresultsinthispapersuggestthatdoingso mayhaveanunintendeddetrimentaleffectonthelabormarketoppor- tunitiesofdisplacedseniorworkersorseniorworkerswantingtochange jobstofacilitatepartialretirement(Kantarci,2013).Intermsofthepol- icymenu,theresultsthereforepointtotheflexibilityapproachbeing thebetterchoiceintermsofaccommodatingforlabormarketmobility ofseniorworkers.Thispaperaddstotheexistingliteratureontheef- fectofchangingtheminimumLRA,whichhasmostlyfocusedonlabor supplyresponsesandprogramsubstitution(seee.g.Börsch-Supanetal., 2017;GeyerandWelteke,2017;ManoliandWeber,2016;Staubliand Zweimüller,2013;Vestad,2013),byexaminingtheconsequencesfor thedemandforseniorworkers.

Theremainderofthepaperisstructuredasfollows:Section2sum- marizessomeoftheexistingliteratureonseniorworkerlabormarket mobility.Section3introducestheinstitutionalchangesbroughtabout bytheNorwegianold-agepublicpensionreformin2011,andmotivates thequasi-experimentalmethodsusedlaterinthepaper.Section4dis- cusseshowthereductionintheminimumLRA asa resultof there- formcanaffectboth(i)thefirm’spropensitytohireseniorworkersand (ii)the(latent)laborsupplyofseniorworkers.Section5describesthe dataused,andpresentssummarystatisticsofthisdata.Section6intro- ducesthebaselinemethodologyusedtoestimatetheeffectofthereform onthehiringofseniorworkers,anddiscussestheestimationresults.

Section7setsouttheextendedmethodologytoestimatetheeffectofa one-yeardecreaseinthedistancetotheminimumLRAonthehiringof seniorworkers,anddiscussestheestimationresults.Section8applies theextendedmethodology onasubsample ofsenior workerhiresto investigatethepossiblemechanismsbehindthedistance-to-retirement effect.Section9concludes.

2. Literature

Saint-Paul(2009)suggeststhreestylizedfactsthatdistinguishsenior workersfromjuniorworkers:(i)theirremainingcareertimeisshort,(ii) theirhumancapitalismorespecifictotheircurrentjob,and(iii)their laborproductivityisfalling.Takentogether,thesethreecharacteristics

arelikelytoadverselyaffectboththesupplyofseniorworkersandthe demandforseniorworkers.

Onthedemandsideofthelabormarket,theuseofdeferredcom- pensationstructurestoalleviatemonitoringproblemsreducesthehir- ingrateofseniorapplicantsastheshortemploymenthorizonforthese workersreducestheeffectivenessofthisstrategy(DanielandHeywood, 2007;Heywoodetal.,2010;Lazear,2011).Thefixedcoststhefirmfaces whenhiringalsoreducesthehiringrate,especiallyasseniorworkers haveagreaterstockofhumancapitalwhichneedstobeupdatedupon startinginanewjob(Hutchens,1986;MontizaanandFouarge,2016).

Firmsarealsorisk-aversewithrespecttotheexpectedproductivityof theapplicantworker,whichisoftendecliningwithage,andtherefore leadsfirmstohirefewerseniorworkersthanjuniorworkers(Heyma etal.,2014;Skirbekk,2004).Theessenceofthisrisk-aversionargument isthathiringaseniorapplicantwhoispaidahighwagebutonlyhasa potentiallyhighproductivitylevelislessappealingtothefirmthanto hireajuniorapplicantwithalowerwageandlowerproductivity.²

Onthesupplysideofthelabormarket,the(latent)laborsupplyof searching seniorworkers (eithercurrentlyemployedor unemployed) will be low due to (i) the potential wage loss upon changing em- ployer(owingtolossoffirm-specifichumancapital),(ii)institutional rules(suchastheaccrualrulesofdefinedbenefitoccupationalpension schemes)and(iii)constraintsonoutsidelabormarketopportunitiesact- ingasalock-ineffectatthecurrentemployer(Hurd,1996;StierandEn- deweld,2015).Technologicalage-biasinjobsearchefficiency(suchas onlinejobportals)owingtoalowercommandofnewjobsearchtech- niques leadstothejobsearchefficiencyofseniorworkerstodecline withage,whichresultsinalowoptimaljobsearcheffort(Legendreand Sabatier,2017).Furthermore,thecloseranunemployedseniorindivid- ualistotheretirementeligibilityage,thelowertheoptimaljobsearch effortbecomesthroughthedecreaseintheexpectedadditionalgainin pensionbenefitsofsearching(Hairaultetal.,2010).

In terms of labor market reforms, Heyman and Skedinger (2011) study the Swedish reform of reducing notice pe- riods for employer-initiated separations for senior workers, and find a positive effect on firms’ propensity to hire senior workers.

Behagheletal.(2008)usealegislativechangeexemptingfirmsfrom layoff taxation forworkers hiredafter theage of 50, andfind that the transition rate from unemployment to employment (interpreted asthehiringrate)forworkersovertheageof50increasedcompared to workers under the age of 50. More closely related to the topic of this paper are reforms to the minimum LRA. Ilmakunnas and Ilmakunnas(2015)exploitaFinnishreformincreasingeligibilityages for unemployment pension benefits and individual early retirement pension benefits and find a positive effect on the hiring of senior workers.The Finnishreformhaddirectimplications forfirms’ labor costs(throughpensioncontributionsandliabilities),whilethispaper studiesareformthatdidnotdirectlyaffectthelaborcostsofthefirm.

BrunelloandLangella(2012)studythechangeintheearlyretirement ageforseveralEuropeancountries,andfindthatinNorthernEuropea one-yearincreaseintheearlyretirementageincreasestheprobability ofseniorworkerstakingupabridgejob,whereasinSouthernEurope thesamechangedoesnotchangetheprobabilityoftakingonabridge job.Martinsetal.(2009)studyanincreaseintheminimumLRAfor womeninPortugal,andfindareductioninthehiringofjuniorworkers

2Theremayalsobealargeupsideriskofhiringaseniorworker(theworker havingahigher-than-expectedproductivitylevel)althoughthedownsiderisk generallyoutweighstheupsiderisk,atleastintermsofphysicallydemanding jobs(Ilmarinen,2002).Totheextentthatthevarianceofproductivitylevelsis greaterforseniorworkerscomparedtojuniorworkers,statisticaldiscrimination couldexplainfirms’ lowpropensitytohireseniorworkers(Heymaetal.,2014).

Intermsofmodelingstatisticaldiscriminationinthehiringofseniorworkers, Manger(2014)showshowlabormarketfrictionsendogenouslyleadtoolderun- employedworkersfacinglowerhiringopportunities,evenforage-independent productivitylevelsandnotrainingcostsuponbeinghired.

0200040006000800010000Number of new worker−firm matches

30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 Age

2002 2008 2014

Fig.1. Numberofnewworker-firmmatchesbyage,2002,2008and2014.Source:Author’sowncalculationsusingdatafromStatisticsNorway.Note:Numberof newworker-firmmatchesin2002,2008and2014inNorwaybyworkerage.Thesampleisrestrictedtonewworker-firmmatcheswithworkersaged30to70at thetimeofhire.SeeSection5forthedefinitionofanewworker-firmmatch.

intheaffectedfirmsasaresultofseniorfemaleworkersbeingretained inthefirmforlonger.

Puttingtogetherthese stylizedfacts about thedemandfor senior workersandthesupplyofseniorworkers,thelowlabormarketmobil- ityofseniorworkersiswellunderstood.AsinmostWesternEuropean countries,thepersistentlylowlabormarketmobilityofseniorworkers isalsomanifestinNorway,asillustratedbythenumberofnewworker- firmmatchesbyageinFig.1.Inthispaper,Iaimtoinvestigateifreduc- ingtheminimumLRAchangestheextenttowhichseniorworkersare hired,usingthereformoftheNorwegianold-agepublicpensionsystem in2011asacasestudy.

3. Institutionalsetting

Inorder tostudytheeffectofreducingtheminimumLRAonthe hiringofseniorworkers,IconsiderthecaseoftheNorwegianold-age publicpensionsystemandtheassociatedreformin2011.³InthisSec- tion,IprovideabriefoverviewoftheNorwegianold-agepublicpen- sionsystem,andhowthereformchangedthesystemdifferentiallyfor differentgroupsofworkersdependingontheirfirmaffiliation.Ifocus ontheearningsmodelforpensionbenefits andtheeligibilitycriteria forpensionclaiming,andrelatethedifferentialreformelementstothe quasi-experimentalsetupusedlaterinthepaper.

3.1. Beforethereform

Irestrictattentiontoseniorworkersintwotypesoffirms:privatesec- torfirmswithoutearlyretirementschemes(henceforthdenotedaspri- vatesectorfirms),andpublicsectorfirmswithearlyretirementschemes (henceforthdenotedaspublicsectorfirms).Priortothereform,themin- imumLRAforold-agepublicpensionbenefits,henceforthdenotedas FT(folketrygd)benefits,wasage67forallworkersconditionalonel- igibility.TheannualFTpensionbenefitsgranteduponclaimingwere calculatedbasedonthesumof(i)abasicpension(grunnpensjon),and

3 Theexpositionoftheinstitutionaldetailsoftheold-agepublicpensionsys- teminNorwayandthechangesbroughtaboutbythepensionreformof2011 inthisSectionborrowsheavilyfromHernæsetal.(2016);Kudrna(2017)and Andersen(2018).

(ii)anearnings-relatedpension(tilleggspensjon)basedonascaledmea- sureofthesumofpensionpointsfromthe20yearsofhighestannual laborincome(Kudrna,2017).

Thefullbasicpensionrequireda40-yearperiodofresidence(count- ingfromage17untiltheclaimingage),andequaledbetween0.85and1 baseamount(1baseamount(BA)in2016=2016-NOK92,576≈2016- USD11,109)dependingonthemaritalstatusandspousalincome.⁴For each yearof residencelessthan40 (butmore thanthree), thebasic pensionwasproportionallyreduced.Forsingleindividuals,andletting R≥3denotethenumberofresidenceyears,theannualbasicpension (GP)measuredinBAwas:

𝐺𝑃 =min{𝑅,40} 40

Theearnings-relatedpensionwasbasedonpensionpointsearnedeach year(P_t)accumulatedbythefollowingscheme,whereY_t>0denotes pre-taxpensionableincomeinyeartmeasuredinBA:⁵

𝑃_𝑡∈{1967,1991}=min{ max{

𝑌_𝑡−1,0} ,7} +max{

min{1 3

[𝑌_𝑡−1−7] ,4

3 },0} 𝑃_𝑡∈{1992,…,}=min{

max{ 𝑌_𝑡−1,0}

,5} +max{

min{1 3

[𝑌_𝑡−1−5] ,2}

,0}

Forages17anduptotheageofpensionclaiming,thepensionpoints accumulatedintheyearsofhighestpre-taxpensionableincome(upto 20years)weresummedanddividedbythenumberofyears(K≤20)to obtainthefinalpensionpointcount(sluttpoengtallet),denotedSLP: 𝑆𝐿𝑃 = 1

𝐾

∑𝐾 𝑗=1

𝑃𝑗

Theearnings-relatedpension(TP),measuredinBA,wascalculatedasa scaledsumofthefinalpensionpointcount(SLP),whereAdenotesthe

4Thenominalvalueofthebaseamount(BA)measureisadjustedeachyear tofollowtheaveragewagegrowthintheeconomy.

5Inadditiontopensionpointaccrualbasedonpensionableincome,individu- alstakingcareofothers(primarilyyoungchildren)areawardedcaretakerpoints (omsorgspoeng)asareplacementofforegoneearnings.SeeAndersen(2018)for moredetails.

numberofyearswithpositive pensionpointaccumulation(i.e.years withmorethanoneBAofpre-taxpensionableincome),asfollows:

TP=SLP× 0.45× max{

𝐴_𝑡∈{1967,1991},40} 40

+SLP× 0.42× min{

𝐴_𝑡∈{1992,…,},40−𝐴_𝑡∈{1967,1991}

} 40

Beforethereform,theannualFTpensionbenefits (𝐹𝑇𝑃=𝐺𝑃+𝑇𝑃) werenotadjustedandthereforeconstitutedafixedlifetimeannualen- titlementuponclaiming.TherewasalsoaminimumannualFTpension benefitthreshold(minstepensjon),varyingbetween1.59BAand3BA dependingonmaritalstatusandspousalincome.IftheannualFTpen- sionbenefitsfellbelowtheminimumannualFTpensionbenefitthresh- old(MP)duetolowearnings-relatedpensions(TP),theindividualwas grantedsupplementalpensionbenefits(særtillegg) equaltothediffer- encebetweenMPandtheannualFTpensionbenefits(FTP):

𝑆𝑇=max{𝑀𝑃−𝐹𝑇𝑃,0}

Asaresult,thetotalannualpensionbenefitsforworkersintheprivate sectorwithno earlyretirementschemeequaled 𝐹𝑇𝑃𝑇=𝐹𝑇𝑃+𝑆𝑇. Forthemajorityofseniorworkersintheprivatesectorwithnoearly retirementschemepriortothereform,theagelimitof67wasthebind- ingeligibilityconstraintintermsofaccessingtheirfullold-agepension benefits,duetosufficientnumberofaccumulationyears(A≥40)and beingpastthepeakoftheirage-earningsprofileintermsof their20 bestyears.⁶

However,seniorworkersinthepublicsectorfirmshadaccesstoa supplementaryearlyretirementscheme,henceforthdenotedastheAFP (avtalefestetpensjon)scheme,wheretheminimumLRAwasage62condi- tionaloneligibility.TheeligibilitycriteriaforaccessingtheAFPbenefits atage62were(i)currentemploymentinapublicsectorfirm,(ii)atleast 3yearstenurewiththepresentemployer,(iii)atleast10yearsofpen- sionableincomeaboveoneBAsinceage50,and(iv)anaverageofthe 10highestannualincomesafter1966exceedingtwoBA(Hernæsetal., 2016).ThesizeoftheannualAFPbenefitsweretypicallycomparableto thetotalannualFTpensionbenefits(FTPT).ThefixedannualAFPben- efits,measuredinBA,werecalculatedasthetotalFTpensionbenefits thatwouldhavebeenawardedgivencontinuedworkuptotheageof 66(denotethis𝐹𝑇𝑃𝑇_̂𝑃)plusanominalannualsupplementalpensionof NOK20,400(≈ 2016-USD2,450)dividedbythenominalvalueofBA inyeart(G_t):

𝐴𝐹𝑃=𝐹𝑇𝑃𝑇_̂𝑃+20,400 𝐺_𝑡

TheAFPbenefitsweresubjecttoastrictearningstestuponclaimingthat waseffectivefromlowlevelsoflaborincome(NOK15,000≈2016-USD 1,800)withnoactuarialadjustmentofbenefits(meaningitconstituted afixedannualentitlement),implyingaveryhighimplicittaxrateon continuedworkaftertheageof62.⁷Asaresultoftheagelimitsand thelackof actuarialadjustmentsoftheold-agepensionbenefits,the observedworkerretirementagespriortothereformwerelargelycon- centratedatage62and63forpublicsectorworkersandatage67for privatesectorworkerswithoutAFP.Thedistributionofretirementages forworkersfromthepublicandprivatesectorfirmspriortothereform isillustratedinFig.2.

3.2. Afterthereform

Theold-agepublicpensionreform,whichwasimplementedinJan- uary2011,reducedtheminimumLRAforFTpensionbenefitsfrom67

6 Forcohorts1938–1943employedintheprivatesectorwithnoearlyretire- mentscheme(andnotondisabilityinsuranceatage66),99.9%ofthesample hadatleastthreeyearsofresidenceand97.8%had40ormoreyearsofresidence atage66.

7 Forcohorts1942–1947employedinthepublicsector(andnotondisability insuranceatage61),theagelimitof62wasthebindingeligibilityconstraint atage61for86.0%ofthesample.

to62,allowedforflexibleclaimingofpensionbenefits(eitherfullyor partially)betweenages62–75,andintroducedactuarialadjustmentof thepensionbenefits.Thismeantthatincontrasttothepre-reformperiod theannualold-agepublicpensionentitlementswerenotfixedregard- lessofthetimeofclaiming,butratherdependedontheindividual’sage atclaimingandbirthcohort.

3.2.1. Cohorts1943–1953

Afterthereform,themodelforcalculatingFTpensionbenefitswas keptlargelyunchangedforthecohorts1943–1953.However,toactuar- iallyadjusttheannualpensionbenefits,thetwocomponentsoftheFT benefits(thebasicpensionGPandtheearnings-relatedpensionTP)are adjustedtotakeintoaccount(i)thecohort-specificlongevity(relative tothe1943cohort)and(ii)theageattimeofclaiming.Morespecif- ically,forcohortcclaimingpensionbenefitsfromage62≤T≤75the twocomponentsaredividedbyanadjustmentfactor(forholdstall) to adjustforthis(denotethisadjustmentfactorbyFHT_c,T):

𝐺𝑃_𝑐,𝑇= GP FH𝑇_𝑐,𝑇 𝑇𝑃_𝑐,𝑇 = TP

FH𝑇_𝑐,𝑇

ThesumofthesetwocomponentsthenconstitutestheFTpensionben- efitsforcohortcwhenclaimingbenefitsfromage62≤T≤75(denote thisFTP_c,T),measuredinBA:

𝐹𝑇𝑃_𝑐,𝑇 = 𝐺𝑃

𝐹𝐻𝑇_𝑐,𝑇 + 𝑇𝑃 𝐹𝐻𝑇_𝑐,𝑇

=𝐺𝑃_𝑐,𝑇+𝑇𝑃_𝑐,𝑇

Similartobefore,iftheFTpensionbenefits(beforeadjustingforcohort- specificlongevityandageatclaiming)fallsbelowtheproductofthe newminimumannualFTpensionbenefit(minstepensjonsnivå)guaran- teedatage67 (MPN_c,67) andtheadjustmentfactorevaluatedatage 67(FHT_c,67),thedifferenceisgrantedassupplementalpensionbenefits (pensjonstillegg)dividedbytheadjustmentfactor(FHT_c,T):

𝑃𝑇_𝑐,𝑇 =max{(

𝐹𝐻𝑇_𝑐,67×𝑀𝑃𝑁_𝑐,67

)−(

𝐹𝐻𝑇_𝑐,𝑇×𝐹𝑇𝑃_𝑐,𝑇) ,0} 𝐹𝐻𝑇𝑐,𝑇

Thetotalannualpensionbenefits atageaforcohort1943≤c≤1953 whenclaimingfromage62≤T≤75(denotethisFTPT_c,T,a)afterthere- formisadjustedbywagegrowthminus0.75%:

FTP𝑇_{𝑐,𝑇 ,𝑎}=[

FT𝑃_𝑐,𝑇+𝑃𝑇_𝑐,𝑇]

(1−0.0075)^𝑎−𝑇

Thecriterion forbeingeligibletoclaimFTpensionbenefits priorto age 67forthese cohortsisbasedonthenotionof sufficientaccrual.

This consistsofhavingenoughFTpensionbenefitentitlements(FTP) andsupplementalpensionbenefits (PT)attheageofpensionbenefit claimingtoachieveahypotheticalleveloftotalpensionbenefitsatage 67largerthanthenew(predicted)cohort-specificminimumannualFT pension benefitguaranteedattheage of67 (MPN_c,67), adjustingfor wagegrowthminus0.75%uptoage67.Denotingtheclaimingageby A<67,theconditionforsufficientaccrualcanbeexpressedas:

[FT𝑃_𝑐,𝐴+𝑃𝑇_𝑐,𝐴]

(1−0.0075)^67−𝐴≥MP𝑁_𝑐,67

Forpublicsectorworkersinthecohorts1943–1953,thereformdidnot change thestructureoftheAFPscheme, meaningthese workersstill facedthesamedisincentivetoworkpasttheageof62asbeforeand nochangeintheminimumLRA.Afterthereform,eligibleworkersin thepublicsectorcanhoweverclaimFTpensionbenefitsfromage62 insteadofage67,butwouldthenhavetodisavowtheirAFPbenefits.

ThemainchangefortheseworkersistheadjustmentoftheAFPbenefits bythewagegrowthminus0.75%,suchthattheannualAFPbenefitsat ageawhenclaimingfromageT(AFP_c,T,a)becomes:

AF𝑃_{𝑐,𝑇 ,𝑎}=FTP𝑇_̂𝑃(1−0.0075)^𝑎−𝑇+20,400 𝐺𝑡

.44

0 .21

0 .11

0 .16

0 .072

0 0

.93

0 .07

0 0 0 0

0.1.2.3.4.5.6.7.8.91Fraction retired

62 63 64 65 66 67 68 69 70

Age

Public sector firms Private sector firms

Fig.2. Distributionofretirementages,publicsectorfirmsandprivatesectorfirms.Source:Author’sowncalculationsusingdatafromtheStatisticsNorway.Note:

Fractionofsampleobservedclaimingold-agepublicpensionforeachage𝑎=62,…,70andthatarenotworkingatage𝑎+1(definedastheannuallaborincomeat age𝑎+1beinglessthan1/2ofannuallaborincomeatagea)priorto2011.Thesampleconsistsofthepre-reformworkerbirthcohorts1938–1943,andclaiming decisionsareobserveduptoandincluding2010.Thedistributionisnotconditionalonworkershavingsufficientpensionbenefitaccrualtoretireattheearliest possibleage.

3.2.2. Cohorts1954andonwards

Forthecohorts1954–1962,theshareofpensionbenefitscalculated bytheoldearningsmodeldescribedinSection3.1decreasesby1/10for eachsuccessivecohort.Thismeansthatforthe1954cohort,1/10ofthe benefitsarecalculatedaccordingtoanewearningsmodel(describedin moredetailbelow)and9/10ofthebenefitsarecalculatedaccordingto theoldearningsmodel.Thenewearningsmodelforcalculatingpension benefitsappliesfullyforthe1963cohortandonwards.

Underthenewearningsmodelforcalculatingpensionbenefits,pen- sionwealthisaccumulatedforanypositivepensionableincome(upto 7.1BA)eachyearbetweentheages17–75atanaccumulationrateof 18.1%.Morespecifically,pensionpointsearnedinyeart(P_t)arecalcu- latedaccordingtothefollowingformula,whereY_t>0denotespre-tax pensionableincomeinyeartmeasuredinBA:

𝑃_𝑡=min{ 𝑌_𝑡,7.1}

Thesumofpensionpointsarethenconvertedintoearnings-relatedpen- sionwealth(pensjonsbeholdning)earnedbyagea≤75(PB_a)byanaccu- mulationrateof18.1%:

𝑃𝐵_𝑎=0.181×

∑𝑎 𝑗=17

𝑃_𝑗

Basedontheearnings-related pensionwealth,theFTpensionentitle- ment(inntektspensjon) foranindividualfrom cohortc claimingfrom age62≤T≤75 (IP_c,T) isfoundbydividingthepensionwealthaccu- mulatedbyageTbyanadjustmentfactor(delingstall)toaccountfor cohort-specificlifeexpectancyandageattimeofclaiming(denotethis adjustmentfactorDT_c,T):

𝐼𝑃𝑐,𝑇 = 𝑃𝐵_𝑇 𝐷𝑇_𝑐,𝑇

If80%ofthetotalFTpensionwealthearnedbyage62≤T≤75falls belowtheproductofthenewminimumFTpensionbenefits(garantipen- sjon)guaranteedatage67(GAP_c,67)andtheadjustmentfactorevaluated atclaimingage67 (DT_c,67),thedifferenceisgranted asnewsupple- mentalpensionbenefits(garantitillegg)dividedbytheadjustmentfactor

evaluatedatage62≤T≤75(DT_c,T):⁸ 𝐺𝐴𝑇_𝑐,𝑇= max{(

𝐷𝑇_𝑐,67×𝐺𝐴𝑃_𝑐,67

)−0.8×𝑃𝐵_𝑇,0} 𝐷𝑇_𝑐,𝑇

Thetotal annualpensionbenefits atage afor cohortc≥1963 when claimingbenefitsfromage62≤T≤75(IPT_c,T,a)afterthereformisad- justedbywagegrowthminus0.75%:

IP𝑇_{𝑐,𝑇 ,𝑎}=[

𝐼𝑃_𝑐,𝑇+GA𝑇_𝑐,𝑇]

(1−0.0075)^𝑎−𝑇

TheconditionforclaimingFTpensionbenefitsbeforeage67forthepure new-systemcohorts(cohorts1963andonwards)isbasedonthenotion ofsufficientaccrual,whichconsistsofhavingenoughFTpensionbenefit entitlements(IP)andsupplementalpensionbenefits(GAT)attheageof claimingtoachieveahypotheticalleveloftotalFTpensionbenefitsat age67greaterthanthenew(predicted)cohort-specificminimumannual FTpensionbenefitguaranteedattheageof67(GAP_c,67),adjustingby wagegrowthminus0.75%uptoage67.Denotingtheclaimingageby A<67,theeligibilityconditioncanbeexpressedas:

[𝐼𝑃𝑐,𝐴+GA𝑇𝑐,𝐴]

(1−0.0075)^67−𝐴≥GA𝑃𝑐,67

Forthehybridcohorts1954–1962,thecalculationofannualpension benefitsandtheeligibilityconditionisaweightedcombinationofthe oldpensionsystemandthenewpensionsystem.Similartothesystem appliedtothecohorts1943–1953asdescribedinSection3.2.1,there- form didnotchange thestructure oftheAFPschemefor publicsec- torworkersfromthecohorts1954andonwards.Similartothecohorts 1943–1953,themainchangewastheadjustmentoftheAFPbenefitsby thewagegrowthminus0.75%,suchthattheannualAFPbenefitsatage awhenclaimingbenefitsfromageT(AFP_c,T,a)becomes:

AF𝑃_{𝑐,𝑇 ,𝑎}=IP𝑇_̂𝑃(1−0.0075)^𝑎−𝑇+20,400 𝐺_𝑡

8Similartothepre-reformbasicpension(grunnpensjon),thefullnewmini- mumFTpensionbenefitsrequiresa40-yearperiodofresidence(countingfrom age17)andisproportionallyreducedforeachyearofresidencelessthan40 (butmorethanthree).

Table1

SummaryoftheNorwegianold-agepublicpensionreform.

Changesfromthereform Privatesector,noAFPscheme Nochangeinreturntowork

ReductionofminimumLRA Publicsector,AFPscheme Nochangeinreturntowork NochangeinminimumLRA Source:Column1inTable1inHernæsetal.(2016,p.41).

3.3. Summaryofthereform

Whilethereform’schangeoftheearnings-relatedpartofthepublic pensionbenefitaccrualmayinthelongrunimprovetheworkincentives ofthecohorts1954andonwards(asallpositivepensionableearnings countforpensionbenefitaccrual,andnotonlypensionableearnings aboveoneBAasundertheoldsystem),themaineffectwastoincrease theprivatesectorworkers’ liquiditywithrespect tothepossibilityof claimingFTpensionbenefits earlierthanbefore.⁹ Basedon thepre- cedingdiscussion,themainreformelementsfortheworkersinprivate sectorfirmsandtheworkersinpublicsectorfirmsaresummarizedin Table1.

Table 1 illustrates that the reform closely resembled a quasi- experimentalsetup,wherethetreatmentgroupconsistsofworkersin the private sector (where theminimum LRA was reduced from age 67toage62)andthecontrolgroupconsistsofworkersinthepublic sector(wheretheminimumLRAwaskeptconstantatage62).Asex- pectedfromTable1,thereformdidnotleadtoeconomicallysignificant changesinthelaborsupplyofneithertheworkersintheprivatesector firmsnoroftheworkersinthepublicsectorfirms(Brinchetal.,2015;

Hernæsetal.,2016).¹⁰Thereformdidhoweverleadtoincreasedhir- ingofseniorworkers,asillustratedbythenumberofnewseniorhires overtheperiod2007–2014inFig.3.Theleveldifferenceofnewsenior hireswassubstantialpriortothereform(averageannualdifferenceof 7,211)whileitconvergesaftertheimplementationofthereform(aver- ageannualdifferenceof4,222),mostlyasaresultofanincreaseinthe numberofseniorhiresintheprivatesectorfirms.Thiscouldsuggest thatthereform’sliquidityelementaffectedthehiringofseniorworkers positively.

3.4. Challengestothequasi-experimentalsetup

However,thepensionreformalsobroughtaboutchangestoathird groupofworkers,namelyworkersinprivatesectorfirmswiththeAFP scheme(constitutingaround50%ofallworkersintheprivatesector).

Priortothereform,theeligibilitycriteriaforandtheearningstestof theprivatesectorAFPbenefitswerelargelythesameasinthepublic sectorfirms.Morespecifically,theworkerhadtobeemployedinan AFP-affiliatedprivatesectorfirmatthetimeofbenefitclaimingandei- ther(i)beemployedbythesamefirmforthelastthreeyearsor(ii)be employedbyaprivatesectorfirmwithAFPforthelastfiveyears.The annualnominalsupplementalpensionwasapproximatelyNOK19,000

9 Themainsampleusedlaterinthepaperconsistsofworkersaged50–61and coverstheyears2007–2014(inotherwordsthecohorts1946–1964).Consider- ingthegradualimplementationofthenewearnings-relatedpartofthepension benefitaccrualafterthereformforcohorts1954–1962,wecanexpectthelabor supplyresponsesasaresultofthistobenegligibleinthisapplication.

10 Asmallpositiveextensivemarginresponsewasrecordedforpublicsector workers,indicatingthatsomefoundcontinuedworkaftertheageof 62at- tractivedespitethatthisimpliedthemdisavowingtheirAFPpensionbenefits (Hernæsetal.,2015).Furthermore,asmallandmarginallysignificantnegative extensivemarginresponsewasfoundforworkersinprivatesectorfirmswithout AFP,despitenoexplicitchangesintheworkincentivesasaresultofthereform (Hernæsetal.,2016).

Table2

NewseniorhiresfromprivatesectorfirmswithAFP,2007–2014.

FractionofnewseniorhiresfromprivatesectorfirmswithAFP:

Year PrivatesectorfirmswithoutAFP Publicsectorfirms

2007 0.192 0.059

2008 0.192 0.070

2009 0.194 0.074

2010 0.179 0.079

2011 0.166 0.069

2012 0.167 0.067

2013 0.162 0.068

2014 0.188 0.066

Source:Author’sowncalculationsusingdatafromStatisticsNorway.

Note:Fractionofnewseniorhiresin(i)privatesectorfirmswithoutAFP (treatmentgroup)and(ii)publicsectorfirms(controlgroup)comingfrom privatesectorfirmswithAFP,2007–2014.Aseniorworkerisdefinedasa workeraged50to61attimeofhire.Thesampleisrestrictedtofirmsmore than5full-timeequivalentsintheyearpriortohiring.

(≈ 2016-USD2,280).However,afterthereformtheAFPbenefitswere subjecttoanactuarialadjustmentuponclaimingandtheearningstest wasremoved,whichspurredasubstantialincreaseinthelaborsupplyof seniorworkersinthesefirms(Brinchetal.,2015;Hernæsetal.,2016).¹¹ Assuch,theremaybedifferentialspillovereffectsfromthesefirmsthat couldinvalidatethequasi-experimentalsetupoutlinedinTable1.For instance,theincreasedlaborsupplyofworkersinprivatesectorfirms withAFPafterthereformcoulddifferentiallychangethepoolofjobap- plicantsavailabletothepublicsectorfirmsandtheprivatesectorfirms withoutAFP.Ifweconsidertherateatwhichseniorworkerstransferbe- tweenthethreetypesoffirmsinthepre-reformandpost-reformperiod inTable2,thereseemstohavebeennolargechangesintheaggregate ratesovertime.Moreimportantly,thetransitionratessuggestthatthere werenodifferentialspillovereffectsfromprivatesectorfirmswithAFP tothetreatmentgroup(privatesectorfirmswithoutAFP)andthecon- trolgroup(publicsectorfirms).

Intermsofdeterminingwhetherpublicsectorfirmsserveasgood controls for the private sector firms in a quasi-experimental setup, Schumann(2017)pointstothestableunittreatmentvalueassumption (SUTVA)andtheassociatedtrade-off between(i)independenceofenti- tiesand(ii)comparabilityintermsofhiringprocesses.Thepublicsector firmsandprivatesectorfirmsgenerallydonotoverlapmuchinterms offirms’ industryclassificationcodes,asillustratedbythedistribution offirmsinthesampleacrossindustriesovertheperiod2007–2014us- ingthefirsttwodigitsoftheSN2007industryclassificationsystemin Table3.¹² Thiscouldsuggestthatthepublicandprivatesectorfirms maydifferintermsofpoolofpotentialjobcandidateswhenhiring,so thatincreasedhiringfromprivatesectorfirmsasresultofthereformdid notaffectthepotentialforpublicsectorfirmstohire.Thelackofover- lapbetweenprivatesectorfirmsandpublicsectorfirmsisalsoevident whenconsideringthejobclassificationcodesofthenewlyhiredsenior workers,furthersubstantiatingtheclaimthattheSUTVAissatisfied(see theOnlineAppendixforthedistributionofnewseniorhiresacrossthe differentjobclassificationcodesusingtheSTYRK98jobclassification system).Assuch,theprivatesectorfirmsandthepublicsectorfirmsare fairlyindependententities,suggestingthattheSUTVAmaywellbesat-

11Forthesakeofbrevity,Iexcludethedetailsonthechangesintheeligibility criteria,pensionbenefitaccrualrulesandtheearningstestfortheprivatesector AFPbenefits.SeeKudrna(2017)andAndersen(2018)formoredetails.

12TheestimationresultsreportedlaterinSection6.2andSection7.2donot changemuchwhenincludingsector-specificlineartimetrendstomitigatethe lackofsectoraloverlap.Thecompleteestimationresultsarerelegatedtothe OnlineAppendix.

14065

15157

14505

13638 13688

12937 12796

12470

6993

8116

6746 6666

8252

9075 8801 8875

6000800010000120001400016000Number of new senior hires

2007 2008 2009 2010 2011 2012 2013 2014

Year

Public sector firms Private sector firms

Fig.3. Numberofnewseniorworkerhires,2007–2014.Source:Author’sowncalculationsusingdatafromStatisticsNorway.Note:Numberofnewseniorworker hires(inprivatesectorfirmsandpublicsectorfirms)withmorethan5full-timeequivalentsintheyearpriortohiring,2007–2014.Aseniorworkerisdefinedasa workeraged50to61attimeofhire.ThedashedverticallineindicatestheimplementationoftheNorwegianold-agepublicpensionreformin2011.

Table3

Distributionoffirmsacrossindustries.

Industryclassification

Privatesector firms

Publicsector firms

Primarysector 0.0208 0.0025

Manufacturing 0.1003 0.0063

Construction 0.0823 0.0072

Wholesaleretailandtrade 0.1533 0.0230

Transportationandstorage 0.1745 0.0160

Accommodationandfoodservice 0.0280 0.0008

Informationandfinance 0.0776 0.0136

Professional,scientificandlegalactivities 0.1774 0.1789

Administration 0.0428 0.2267

Education,humanhealthandsocialwork 0.0852 0.4760

Other 0.0578 0.0489

Source:Author’sowncalculationsusingdatafromStatisticsNorway.

Note:Fractionoffirmsineachindustrycategory(byfirmtype),basedonthe twofirstdigitsofthefour-digitSN2007industryclassificationasfollows:pri- marysector∈{01,02,03,05,06,07,08,09};manufacturing∈{1x,2x,30,31, 32,33,35,36,37,38,39}for𝑥=0,1,…,9;construction∈{41,42,43};whole- saleretailandtrade∈{45,46,47};transportationandstorage ∈{49,50,51, 52,53};accommodationandfoodservice∈ {55,56};informationandfinance

∈{58,59,60,61,62,63,64,65,66};professional,scientificandlegalactivities

∈{69,70,71,72,73,74,75};administration∈{77,78,79,80,81,82,84};

education,humanhealthandsocialwork∈{85,86,87,88,89};other=none oftheabove.SeeStatisticsNorway(2008)foracomprehensiveoverviewofthe SN2007industryclassificationstandard.

isfied.¹³Toassesswhetherthelackofsectoraloverlapcouldchallenge theeconomiccomparabilityofthehiringprocessintheprivatesector firmsandpublicsectorfirms, Inowconsiderthemechanismsbehind howareductionintheminimumLRAcanaffectboththefirms’ hiring ofseniorworkersandthe(latent)laborsupplyofseniorworkers.

13 Totheextentthattherearepotentialspillovereffects,itwouldreducethe publicsectorfirms’ propensitytohireseniorworkers.Inthiscase,theestimated effectofthereformonthehiringofseniorworkerswouldthereforebeoveres- timated.

4. Mechanisms

InthisSection,Idiscusshowchangesinthedistancetoretirement asaresultofreducingtheminimumLRAcouldpotentiallyaffectboth thefirms’ hiringofseniorworkersandtheseniorworkers’ jobsearch behavior,withreferencetotheelementsoftheold-agepublicpension reformsketchedoutinSection3.

4.1. Hiringofseniorworkers

Whenafirmchoosestohireaseniorapplicantforavacantposition, thisisequivalenttothefirmmakingacomplex,andinlightofstrictem- ployeeprotectionlegislation(henceforthdenotedasEPL),apotentially irreversibleinvestmentdecision.AsarguedbyHairaultetal.(2010,p.

1037)inthecontextoffirmshiringseniorworkers:

[...]retirementageisprivateandasymmetricinformation.Firms mustsolveapotentiallydifficultproblemtoinfertheexpectedre- tirementageforeachindividual,especiallywhentheSS[socialse- curity]systemisactuariallyfair,thatis,whenretirementagerelies onindividualpreferencesforleisure.

Ofcourse,thesamecomplexinvestmentproblemofderivingtheex- pectedlengthoftheemploymentrelationshiparisesforafirmhiringa workeratanyage.However,whatdistinguishesaseniorworkerfrom otherworkersistheirclearoutsideoptionofclaimingold-agepension benefitsandwithdrawingfromthelabormarketuponreachingeligibil- ity.Thismeansthat,roughlyspeaking,aseniorworkerwhohasreached eligibilityhastwoopportunitiesfromthefirm’spointofview:(i)con- tinueworking(withorwithoutclaimingold-agepensionbenefits),or (ii)retireandclaimold-agepensionbenefits.Sinceaseniorworker’sex- tensivemarginchoiceessentiallyonlyconcernscontinuedemployment withinthesamefirm(thesupplysidefactorsaresketchedoutingreater detailintheliteraturereviewinSection2),thehorizonoftheemploy- mentrelationshipismoresalientforfirmswhenhiringseniorworkers comparedtohiringjuniorworkers.¹⁴Forfirmshiringseniorworkers,

14SurveysofNorwegianemployersovertheperiod2008–2015indicatethat thisisasalientconsiderationforfirms,witharound30%ofrespondents(man-

thehorizonof theemploymentrelationshipwillthereforein general coincidewiththedistancetotheworker’sexpectedretirementage.

Theexpecteddistancetoretirementforanewseniorhiremattersto thehiringfirmfortworeasons,whichwecandenoteas(i)the“horizon” effectand(ii)the“lock-in” effect.Thefirsteffectconcernsthetimepe- riodoverwhichthefirmcanamortizeanyfixedcostsofhiringsuchas vacancypostingcostsortrainingcosts(MühlemannandLeiser,2015;

Oi,1962).Thesecondeffectconcernsthepossibilityofthefirmata laterpointintimeendingupwithasenioremployeewithalowpro- ductivityrelativetotheperceivedproductivityatthetimeofhire(due toforexampleanegativehealthshock,poormatchqualityorgeneral productivitydepreciation)whoitcannotdismissduetostrictEPLand whosewagemaynotunilaterallybeadjusteddownwards.¹⁵Thelonger theexpecteddistancetoretirement,thelongeristhetimeperiodover whichthefixedcostsofhiringcanbeamortized(apositiveeffecton firmsurplus).However,thegreaterisalsothecumulativeriskofending upwithalow-productiveemployee(anegativeeffectonfirmsurplus).

Inshort,thehorizoneffectincreasesthefirm’spropensitytohiresenior workers,whereasthelock-ineffectreducesthefirm’spropensitytohire seniorworkers.

Whenarguingthattheexpecteddistancetoretirementmattersto thefirmwhenhiringaseniorworker,wecandistinguishbetweentwo metricsthefirmcaresabout: (i)theminimumLRA,and(ii) theage atwhichtheworkeractuallyretiresandclaimsold-agepensionben- efits.UndertheNorwegianpre-reformregime,thetwometricswould largelycoincideforboththepublicsectorworkers(atage62)andthe privatesectorworkers(atage67),asillustratedinFig.2.UndertheNor- wegianpost-reformregime,theminimumLRAconstitutesarule-based lowerboundontheactualretirementage.Forprivatesectorworkers, thislowerboundisdisentangledfromtheactualretirementage,which isseparatelydeterminedbyindividualcharacteristics(e.g.preferences, wealth,familysituation,health,etc.).Forpublicsectorworkers,thetwo metricscontinuedtocoincideduetothework(dis)incentivesafterage 62beingthesamebeforeandafterthereform.

Underthepre-reformregime,thehighminimumLRAforworkers inprivate sectorfirms oftenmeantalarge spilloverintothedisabil- ityinsurance(DI) programme.Underscreeningconditionsrelatedto healthstatusandassociatedreduced workcapacity, aseniorworker couldclaimDIpensionbenefitspriortotheminimumLRA.Thismeant thatforsomeeligibleseniorworkerstheDIprogrammeessentiallycon- stitutedaconditional-on-healthearlyretirementscheme. Thishealth- dependentretirementpathwaywasextensivelyusedbothpriortoand afterthereform,asillustratedbytheagedistributionofnewDIbenefit recipientsinFig.4.Underthepre-reformregime,aprivatesectorfirm whoemployedaseniorworkersubjecttoanadversehealthshockwas thereforenotexposedtothefullextentofthenegativelock-ineffect,as theworkercouldenrollintheDIprogrammeconditionalonpassingthe screeningprocess.

However,forseniorworkerswhobecamelow-productivebecauseof eitheraless-than-adversehealthshock(wheretheworkerinquestion didnotpassthescreeningprocessforDIbenefits),generalproductiv- itydepreciation(andconsequentlowercommandofjobtasks),orwho simplyturnedouttobeapoorworker-firmmatchafterthetimeofhire, thelock-ineffectwasstillpresentforprivatesectorfirms.¹⁶Ifthein-

agers)reportingthataworkerwhoistobehiredshouldhaveatleast10years leftofhisorhercareer.Only15–20%oftherespondentsindicatethatthedis- tancetoretirementdoesnotaffecttheirhiringdecision(Dalen,2015).

15 CollectivewagebargaininginNorwayfollowsatwo-tiersystem,withthe settingofcentrallevel“tariff wages” andallowingforlocallevel“wagedrifts” (Barthetal.,2014).Thecollectivewageagreementscoveraround2/3ofall employeesandleadtoacompressedwagedistribution(IMF,2016),suchthat thescopeforunilateraldownwardsadjustmentofwagesbythefirmislimited.

16 AccordingtoGalaasenetal.(2012)therejectionratesforDIbenefitappli- cantsarethehighestforworkerswithcomplexmusculoskeletaldiagnoses,as theyareonaverageregardedaslessincapableofworking(comparedtothe

terestsofthefirmandtheworkerwerenon-aligned,meaningthefirm wantedtodismisstheworkerbuttheworkerwantedcontinuedemploy- ment,thefirmcouldnotsimplydismisstheworkeratitsownbehestdue tostrictEPL.¹⁷Therecouldalsobestigmacostsassociatedwithbeing onDI,deterringindividualsfromapplying(Hernandezetal.,2007).Of course,theinterestsofthefirmandtheseniorworkercouldverywellbe aligned:thefirmwantingtodismisstheworkerandtheworkerwanting toleavethefirm.However,thecombinationof pooroutsideemploy- mentopportunitiesfortheseniorworker(DornandSousa-Poza,2010) andthefirmfacingpotentiallyhighcostsofseverancepaymentstocom- pensatetheworkerforthelackofgoodoutsideopportunities(Hallberg andEklöf,2010; Huberetal.,2016) ledtothemutuallyundesirable lock-ineffect.

Whiletheprivatesectorfirmsandthepublicsectorfirmsoperatein differentsectorsandpostvacanciesthatdifferintermsofjobclassifi- cationcodes(seeSection3.4),bothtypesoffirmsarelikelytowantto avoidthisgenerallock-ineffectwhenconsideringjobapplicants.With publicfirmsmostlyoperatingwithineducation,humanhealthandso- cialworkandprivatesectorfirmswithintransportation,manufacturing andretail,bothtypesoffirmsareexposedtoworkershavingstrenuous tasksandthesubsequentriskofthenegativelock-ineffect.Toillustrate thatthislock-ineffectcouldverywellbeaimportantconsiderationfor employersingeneralwhenhiring,Fig.5showstheaveragetransition ratefromgoodtobadhealth(basedontheself-reportedhealthstatus fromtheNorwegianLaborForceSurvey)byageandeducation.While thetransitionratefromgoodtobadhealthisgenerallyincreasingby ageforalleducationgroups,theincreaseisespeciallypronouncedfor workerswithonlycompletedcompulsoryeducation.

Underthepost-reformregime,thelock-ineffectinthecaseofaligned interestswasreducedforbothseniorworkersandfirmssincethemin- imumLRAwasreduced.Fortheworkers,theoptionofretirementwas madeavailableatanearlierstageforthosewantingtoleavethefirm, forexampledue topoorerhealth.Therecouldbe ahostof otherso- called“jumpfactors” leadingtoseniorworkerswantingtoretireatan earlyage,butthereisevidencepointingtopoorhealthbeingthekey factorexplaining whyseniorworkers choosetoretireearly(see e.g.

(BråthenandBakken,2013;DwyerandMitchell,1999;García-Gómez, 2011)).Indeed,thedistributionofretirementagesforworkerscoming fromtheprivatesectorfirmsbecamemoreevenlydistributedafterthe reform(illustratedinFig.6),whichindicatesthatthelock-ineffectwas mitigatedasaresultofthereductionintheminimumLRA.Forfirms, thepossibilityforseniorworkerstoclaimbenefitsearliercouldmean thattheassociatedpotentialcostsofseverancepaymentswerereduced, atleastwithinabehavioralinterpretationofworker behavior.¹⁸This thenimpliesthatthereductionintheminimumLRAcouldbeasalient featureforprivatesectorfirmswhenhiring,asareductionofthisthresh- oldreducedthepotentialnegativelock-ineffect.Thereductioninthe minimumLRAcouldthereforebethoughtofasgivingfirmsaccessto a“safetyvalve” whenhiringaseniorworker,withthedownsiderisk

well-definedmusculoskeletaldiagnoses)bytheNationalInsuranceadministra- tion.Withtheseconditionsoftenstemmingfromrepetitivemanualworkorpsy- chosocialstrain,seniorworkerswithlongworkinglivesbehindthemcouldbe especiallyexposedtoDIapplicationrejection.

17NorwayisrankedasacountrywithafairlyhighdegreeofEPL,andfirms cangenerallyonlydismissworkersifthefirmismakingalossorincasesofa worker’smaterialbreachoftheemploymentcontract(OECD,2013,p.81–83).

Therearenoformalrulesonhowdownsizingshouldbecarriedout,although the“lastin,firstout”-ruleisastrongnorm(Huttunenetal.,2011).Uponjobloss workerscanapplyforunemploymentbenefits,witharequirementofincomeof atleast1.5BAinthepastcalendaryear.

18Aneconomicallyrationalworkerwoulddemandthesameseverancepayas beforethereform,astheannualold-agepublicpensionbenefitsafterthereform weresubjecttoactuariallyfairreadjustments(seeSection3.2).Forindividuals withhyperbolicdiscountingorwhoexhibitpartialinattentionbehavior(seee.g.

Gabaix,2016),thisneednotbethecase.

05101520253035Percent

18−19 20−24 25−29 30−34 35−39 40−44 45−49 50−54 55−59 60−64 65−67 Age

2007 2008 2009 2010

2011 2012 2013 2014

Fig.4. DistributionofnewDIbenefitrecipientsbyage,2007–2014.Source:DatafromNorwegianLabourandWelfareAdministration(2016).Note:Percentofnew disabilityinsurance(DI)benefitrecipientswithineachfive-yearagebin(ages18–67).Lightgraybarsindicateperiodunderthepre-reformold-agepublicpension system(2007–2010),whiledarkgraybarsindicateperiodunderthepost-reformold-agepublicpensionsystem(2011–2014).

0.02.04.06.08.1.12Transition rate, good to bad health

22 27 32 37 42 47 52 57 62 67

Age

Compulsory education (smoothed) Compulsory education (data) High school (smoothed) High school (data)

) a t a d ( e g e ll o C )

d e h t o o m s ( e g e ll o C

Fig.5. Transitionratesfromgoodtobadhealth,byageandeducation.Source:Author’sowncalculationsusingdatafromtheNorwegianLaborForceSurvey (coveringtheyears2002,2004–2008and2010–2014).Note:Averagerateoftransitionfromgoodtobadhealth(self-reported)foremployedindividualsbyage (collapsedinto5-yearbins)andeducationlevel(compulsoryeducation,highschoolandcollege)fortheyears2002,2004–2008and2010–2014.Thesmoothingof thedatapointsisdoneusinglocallyweightedlinearregressionoftheaveragetransitionrateonage,withbandwidth=0.8.

ofhiringaseniorworkerpotentiallybeinggreaterthantheupsiderisk.

Assuch,weshouldexpectapositiveshiftinprivatesectorfirms’ hiring ofseniorworkers,resultingfromthereductionof theminimum LRA andthesubsequentreductionofthepotentiallock-ineffect.Duetothe actuarialadjustmentoftheFTpensionbenefits,theincentivestokeep workingforlonger(orshorter)thanbeforewerenotchangedasaresult ofthereform.Whiletheworkercouldnowleavethefirmearlierthan before,theincentivestodosodidnotchangeandthustherewasno changeintheuncertaintyof“losing” productiveworkers.Thereforewe shouldexpectthattherewasnochangeinprivatesectorfirms’ hiring duetochangestothehorizoneffect,withtheonlychangecomingfrom thereducedlock-ineffect.Forpublicsectorfirms,weshouldexpectno

changeinhiringasaresultofthereform.Thisisbecausetheincentives toworkpasttheunchangedminimumLRAdidnotchange,meaning therewasnochangeinneitherthehorizoneffectnorthelock-ineffect.

4.2. Seniorworkers’ jobsearch

OneofthepotentialconsequencesofareducedminimumLRAon thelatentlaborsupplyofsearchingseniorworkers(thejobsearchin- tensity)wasareductionintheneedforbridgejobsandthusareduction inthenumberofseniorjob-to-jobtransitions.Bridgejobsarejobsthat senior workerswhowant toperform gradual retirementin theform ofreducingtheworkburden(eitherthroughreducingthenumberof

0 .13

0 .073

0 .069

0 .06

0.025 .93

.64

.07

0 0 0 0 0

0.1.2.3.4.5.6.7.8.91Fraction retired

62 63 64 65 66 67 68 69 70

Age

Pre−reform, private sector firms Post−reform, private sector firms

Fig.6. Distributionofretirementages,privatesectorfirms.Source:Author’sowncalculationsusingdatafromtheStatisticsNorway.Note:Fractionofsample observedclaimingold-agepublicpensionforeachage𝑎=62,…,70andthatarenotworkingatage𝑎+1(definedastheannuallaborincomeatage𝑎+1beingless than1/2ofannuallaborincomeatagea)priorto2011.Thepre-reformsampleconsistsofworkercohorts1938–1943(claimingdecisionsareobserveduptoand including2010),whilethepost-reformsampleconsistsofworkercohorts1947–1951(claimingdecisionsareobservedduringtheperiod2011–2014).

0.219 0.220 0.216 0.219 0.219 0.218

0.199

0.217

0.158

0.137 0.141

0.173 0.168

0.143 0.145 0.147

0.05.1.15.2.25.3Proportion of new jobs that were brigde jobs

2007 2008 2009 2010 2011 2012 2013 2014

Year

Public sector firms Private sector firms

Fig.7.Bridgejobsasproportionofnewseniorhires,2007–2014.Source:Author’sowncalculationsusingdatafromStatisticsNorway.Note:Proportionofnew seniorworkerjob-to-jobtransitionsthatwerebridgejobsinprivatesectorfirmsandpublicsectorfirms,2007–2014.Abridgejobisdefinedasajobwithareduction inboththenumberofworkinghoursandtheannualtotalwageincomeby25%ormorecomparedtopreviousjob.Aseniorworkerisdefinedasaworkeraged50 to61attimeofhire.ThedashedverticallineindicatestheimplementationoftheNorwegianold-agepublicpensionreformin2011.

workinghoursorchangingworktasks)takeonbychangingfromtheir careeremployertoashort-termjobintheyearspriortofullretirement (BrunelloandLangella,2012;Kantarci,2013).Whythereformshould affectthisisperhapsbestillustratedbyahypotheticalexample.Con- sideraworker ofage60whoworkedinaphysicallydemandingjob (e.g.industrialprocessing)inaprivatesectorfirm.Priortothereform thisworkerwouldhave7moreyearsleftuntiltheminimumLRA,and wouldthereforeperhapswanttochangetoalessdemandingjobtoease theworkburden.Afterthereform,thesameworkeronlyhad2yearsleft untiltheminimumLRAandwouldthereforeperhapsnothavethesame needforabridgejobtoreducetheworkburden,asthetimeremain-

ingwasshorter.Fig.7illustratestheproportionoftheseniorjob-to-job transitionswhereboththenumberofworkinghoursandtheannual wageincomeinthenewjobwasreducedby25%ormorecomparedto thepreviousjob.Asisevident,therewasaslightreductionfrom2010 to2011intheproportionofnewseniorworker job-to-jobtransitions thatwerebridgejobsfortheprivatesectorfirmsandseeminglyatrend reversal,whiletheproportionforthepublicsectorfirmsstayedfairly stable.Thislendssomesupporttotheaforementionedhypothesis.

ThereducedminimumLRAcouldalsopotentiallyreducetheincen- tivesforjob-to-jobmovementsfromprivatesectorfirmstopublicsector firms.Thisisalsobestillustratedbyahypotheticalexample.Considera

workerofage55inaprivatesectorfirmwhowantedtoretireasearly aspossible,butdidnotqualifyforDIbenefits.Theworkercouldthen applyforajobinapublicsectorfirm,fulfilltheeligibilitycriteriafor publicAFPbenefitsandthusretireatage62insteadofage67.Afterthe reform,thesameworkerdidnothavethesameincentivetosearchfor jobsinthepublicsectorduetothereducedminimumLRAintheprivate sectorfirms.Whilethiscouldchangethepoolofapplicantspublicsec- torjobsandthuschallengethequasi-experimentalsetup(asdiscussed inSection3.4),itisworthwhilenotingthatthereisalackofsectoral overlapforthepublicsectorandprivatesectorfirms(seeTable3for thedistributionoffirmsacrossindustries).Thelackofsectoraloverlap inconjunctionwithlargelynon-overlappingjobcodes(seetheOnline Appendix)suggeststhattheworktasksoftheemployeesinthesefirms donotoverlap,whichwilllimittheextenttowhich aseniorworker caneasilychangeemploymentacrossprivateandpublicsectorfirms.

Assuch,thechangeintheincentivestoperformjob-to-jobmovements asaresultofthereformseemslimited.

5. Dataandsummarystatistics

Fortheremainderofthepaper,Iconsiderthepopulationofprivate sectorfirmsandpublicsectorfirmsasunitsofanalysis,restrictingthe sampletofirmswith5ormorefull-timeequivalents(FTEs)toavoid thehiringdecisions ofsoleproprietorshipsandsmallerfirms. Anew hireinyeartisdefinedasanindividualregisteredasanemployeein afirmjinyeartwhoin year𝑡−1was(i)registeredasemployedin anotherfirmk≠j,(ii)receivedsomeformofsocialsecuritybenefits,or (iii)wasoutsidethelaborforce.AsnotedbyJohansen(2013),thenum- berofnewhiresinanygivenyearwilldiffersubstantiallydependingon thedefinitionof“anotherfirm”.Idefineanotherfirmasafirmwitha differentestablishmentidentifier(butnotnecessarilyadifferententer- priseidentifier)toavoidpossiblemisclassificationofjob-to-jobtransi- tions(Johansen,2013,p.9).¹⁹Anadditionalrestrictionimposedisthat anestablishmentisdefinedasahiringfirminyeartonlyiflessthan 50%ofthenewhiresintheestablishmentinyeartcomefromthesame enterprise(Lien,2014).Ifafirmhiresseveralnewworkers,butwhere morethan50%oftheseworkerscomefromadifferentestablishment identifierbutwithidenticalenterpriseidentifier,thefirmisdefinedas anon-hiringfirmandthenewworkersinthefirmarenotconsidered newhires.

IntheempiricalanalysisIrestrictattentiontonewseniorhires,de- finedasworkersbetweenages50to61attimeofhire.ThismeansthatI onlyconsidernewseniorhireswherethedistancetotheminimumLRA isoneyearormore,regardlessoftheold-agepublicpensionregimein placeandthefirmtypeinquestion(publicorprivate)atthetimeof hire.Theperiodofanalysisisrestrictedtotheperiod2007to2014.

Thedecisiontoanalyzethisperiodrelatestothetimingofthereform.

Thereform’sbasicprincipleswereagreeduponinParliamentinMay 2005(NorwegianMinistryof Finance,2005),thelawwaspassedby ParliamentinMay2009(NorwegianMinistryofLabourandSocialIn- clusion,2009)anditwasimplementedinJanuary2011.However,alaw onmandatoryoccupationalpensionschemeswasimplementedin2006 (NorwegianMinistryofFinance,2006),whichmayservetoconfound hiringpropensitiesbefore2007.Adetaileddescriptionofhowthedata setusedintheempiricalanalysisisconstructedisdeferredtotheOnline Appendix.

Theresultingdatasetindicatesthatthepublicsectorfirmsarelarger thantheprivatesectorfirmsintermsofthenumberoffull-timeequiv- alentsoverthesampleperiod,illustratedbythefirmsizedistributions inPanelAinFig.8.Thedifferencesinfirmsizesarealsoreflectedin theaveragenumberof newhiresforprivatesector firmsandpublic

19 TheresultsinSection6.2andSection7.2whenrestrictingthedefinition of“anotherfirm” tobothadifferentestablishmentidentifierandadifferent enterpriseidentifierarequalitativelythesame.Theresultsareavailablefrom theauthoruponrequest.

Table4

Summarystatisticsofnewhires.

Privatesector firms

Publicsector firms Numberofnewhiresintotal 491,145 627,010

Numberofuniquefirms 33,679 18,961

Prop.ofnewhiresthataresenior 0.129 0.174

[0.336] [0.379]

Educationlevel

Compulsory 0.432 0.291

Highschool 0.287 0.203

College 0.281 0.506

Pre-hirestate

Sick-leavebenefits 0.064 0.082

Workassessmentallowance 0.043 0.074

Disabilitybenefits 0.040 0.070

Financialassistanceprogram 0.012 0.010

Unemploymentbenefits 0.102 0.058

Outsidelaborforce 0.198 0.115

Employed 0.541 0.590

Source:Author’sowncalculationsusingdatafromStatisticsNorway.

Note:Summarystatisticsofnewhiresinprivatesectorfirmsandpublicsector firmswithmorethan5FTEsintheyearpriortohiring,2007–2014.Numbers insquarebracketsdenotethestandarddeviations.Educationlevelandpre-hire statereferstothenewseniorhires(workersaged50–61attimeofhire).Ifthe seniorworkerisnotemployedinyear𝑡−1,thestateinyear𝑡−1isdefined asthelastobservedstateinthethreemonthspriortotheemploymentstart dateinyeart.Summarystatisticsbypre-andpost-reformperiod,moredetailed worker-levelsummarystatisticsandtheevolutionofmeanrealhourlywages aredeferredtotheOnlineAppendix.

sectorfirms,illustratedbythedistributionsofaveragenumberofnew hireseachyearinPanelBinFig.8.Intheempiricalspecificationsin Sections6and7,Itakeintoaccountthesubstantialleveldifferencesin thenumberofnewhiresbetweentheprivatesectorfirmsandthepub- licsectorfirmsbyweightingtheregressionsbythenumberoffull-time equivalentsintheyearpriortohire.

FromTable4,wefindthatthereweremorenewhiresinthepublic sector firmsthanintheprivatesector firms.Atthesametime,there areabouthalfasmanypublicsectorfirms(18,961)astherearepri- vatesectorfirms(33,679),reflectingthepatternillustratedinPanelB inFig.8.Ofthenewhires,publicsectorfirmshaveagreaterpropor- tionthatareseniorcomparedtotheprivatesectorfirms(17.4%versus 12.9%).50.6%oftheseniorworkershiredinpublicsectorfirmshave collegeeducationwhileonly28.1%ofseniorworkershiredinprivate sectorfirmshavecollegeeducation,mirroringthedistributionofprivate andpublicsectorfirmsacrossindustriesinTable3.Agreaterproportion oftheseniorworkershiredinprivatesectorfirmscomefromunemploy- mentbenefitsorwereoutsidethelaborforceintheyearpriortohire comparedtotheseniorworkershiredinpublicsectorfirms(10.2and 19.8%versus5.8and11.5%).Commonforbothtypesoffirmsisthat mostofthenewseniorhiresarejob-to-jobtransitions(54.1%forprivate sectorfirmsand59.0%forpublicsectorfirms).

6. Baselinemethodology

InthisSection,Iintroducethebaselinedifference-in-differencelin- earprobabilitymodelsusedtoestimatetheeffectoftheold-agepublic pensionreformonthehiringofseniorworkers.Theestimationresults fromthebaselinespecificationarepresented,andseveralspecification testsarecarriedout.

6.1. Empiricalspecification

Theidealunitofanalysistoidentifytheeffectofchangingthemini- mumLRAonthehiringofseniorworkerswouldbedetailedinformation

Fig.8. Distributionoffull-timeequivalents(FTEs)andnewhires,2007–2014.Source:Author’sowncalculationsusingdatafromStatisticsNorway.

Note:Numberoffull-timeequivalents(PanelA)andnewhires(PanelB)inprivatesectorfirms(hollowbars)andpublicsectorfirms(graybars),2007–2014.The distributionoffull-timeequivalents(PanelA)ishereboundedovertheinterval[5,50]foreaseofexposition,whilethedistributionofaveragenumberofnewhires (PanelB)isboundedovertheinterval[0,20]foreaseofexposition.SeetheOnlineAppendixforfurtherdetailsonhowFTEsaremeasured.Thesampleofnewhires isrestrictedtoworkersaged30to75attimeofhire.

aboutapplicantstoapostedvacancy,aswecouldthenobserveboththe realizedfirm-workermatchandthediscardedapplicants.However,this dataisnotreadilyavailable.Asaresult,theprimaryunitofanalysisin theempiricalmodelisafirm(eitheraprivatesectorfirmorapublic sectorfirm)thateitherhiresordoesnothireaseniorworker.Asastart- ingpoint,Iestimatethefollowingconventionaldifference-in-difference linearprobabilitymodel:

𝑌_𝑗𝑡=𝛼_𝑗+𝛽𝑇_𝑗𝑅_𝑡+𝛿𝑇_𝑗+𝜆𝑅_𝑡+𝜀_𝑗𝑡 (1) InEq.(1),theoutcomevariableY_jtisadummyvariableequaltooneif firmjhiresatleastoneworkerofagea∈[50,61]inyeart,andzerooth- erwise.T_jisatreatmentvariableequaltooneiffirmjisaprivatesector

firm(treatedfirms),andzeroforpublicsectorfirms(non-treatedfirms).

R_tisanindicatorvariableequaltooneifyeartisinthepost-reform period (2011–2014)andzeroin thepre-reformperiod(2007–2010).

Furthermore,𝛼jisafixedeffectforfirmj.Thedifference-in-difference coefficient𝛽measuresthereformeffectofdecreasingtheminimumLRA byfiveyearsonthe(unconditional)probabilityofatleastonenewse- niorhire(measuredinpercentagepoints).Theresultingpointestimate fortheaggregatereformeffect(̂𝛽=0.0081,SE(̂𝛽)=0.0008)indicates thatthereformleadtoa0.81percentagepointincreaseintheproba- bilityofhiringaseniorworker(ora16.3%increaseintheprobability ofhiringaseniorworkerrelativetothepre-reformmeanof0.0497).

In termsof thereform’s effecton the employment/non-employment