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Government and Economy

Will Mandatory Continuous Employment up to the Age of 65 Decrease Employment Opportunities for Young Workers?

Yoshihiko Fukushima
Professor, Faculty of Political Science and Economics, Waseda University

The Elderly Employment Stabilization Act (henceforth denoted EESA) was revised in August 2012, and is to be enforced from April 1, 2013. This revision requires companies to keep employment contracts until workers reach the age of 65. One of the reasons for this revision is that the government changed the age at which pensions are payable from the age of 60 to the age of 65. Namely, from April 2013 there could be some elderly people that will have some period without any income between the retirement age of 60 and the age of 65, at which pensions are payable. To avoid this possibility, the government requires that companies keep employment for the elderly until workers reach 65 years of age. This article discusses the impact of the revisions of EESA on the Japanese labour market.

Extension of employment contracts for the elderly and employment opportunities for the young

According to the Labour Force Survey of the Ministry of Internal Affairs and Communications Statistics Bureau, while the population aged 20 to 24 has been decreasing since it peaked in 1995, the population aged 55 to 59 has been increasing since 1968. Furthermore, the population aged 55 to 59 exceeded the population aged 20 to 24 for the first time in 2000. This means that the population aged 55 to 59 has been higher than the population aged 20 to 24 since 2000 and the gap is getting larger every year. In terms of unemployment rates in the last decade, on the one hand, the unemployment rate for age 15 to 19 was between 9% and 12% and the unemployment rate for age 20 to 24 was between 8% and 9%. On the other hand, the unemployment rate for age 55 to 59 was between 3% and 4% during the same period. This implies that the labour market environment is more favorable for elderly people who are close to the retirement age of 60 than for young graduates newly entering the labour market. Under these circumstances, there is a debate as to whether the extension of employment contracts for the elderly will decrease employment opportunities for the young workers.

Looking at the situation conversely, if elderly workers retire earlier, will employment opportunities for young workers increase as a result? In fact, during the 1980s and early 90s in Europe, many countries adopted policies to encourage elderly workers to retire earlier than their retirement age (early retirement policies). The purpose of these policies is to increase employment opportunities for young workers. However, these early retirement policies did not increase youth employment as had been expected. There are two reasons for this. One reason is that elderly workers and young workers were not substitute/exchangeable labour inputs. Namely, in order to keep the same productivity, even if elderly workers are replaced with young workers, the youth and the elderly must have equivalent skills and knowledge. However, it is not quite common that young workers have the same skills and to be able to accomplish the same task as elderly workers. In fact, many empirical studies show that young workers are not substitutes, but rather complements. In other words, elderly workers and young workers create added value together. The other reason is that early retirement policies raised social welfare costs including pensions, and as a result social insurance premiums to be covered by employers increased. Namely, due to the significant increase in payroll taxes, it was not possible to newly hire the same number of new employees as the number of retirees in these countries. Early retirement policies caused social welfare costs to increase and the number of workers who cover these costs to decrease. One thing that could be said based on these experiences in Europe is that extending the employment of the elderly will not necessarily result in a decrease in employment opportunities for young workers.

Furthermore, as suggested by the fact that the jobs-to-applicants ratio for new graduates was mostly over 1 even during the recession following the collapse of the Japanese economic bubble, there is a high level of labour demand for new graduates. In addition, many Japanese companies develop young human resources based on a long-term perspective, and this is not something that is likely to change in the future. Given this situation, the extension of employment contracts for the elderly are not likely to result in a decrease in youth employment.

What kind of impacts will the extension of employment contracts for the elderly have?

The extension of employment contracts for the elderly will result in a reduction of wage levels for workers rather than a decrease in youth employment. With the upcoming extension of employment contracts for the elderly, workers are to be retired at age 60 and then rehired with new employment contracts. In many cases, there will be significant reductions in wage levels from the wage levels at the retirement age of 60 when the new contracts are concluded. However, even if the wages of workers over age 60 are significantly reduced, the extension of employment contracts for the elderly still represents an increase in total labour costs for employers. According to some interviews with personnel in several Japanese companies, the increase in total labour costs caused by extending elderly employment contracts will be compensated for by adjusting wages for workers under age 60. In other words, companies will attempt to suppress increases in total labour costs not by reducing employment opportunities for young workers, but rather by reducing wages for employees under the age of 60.

Taking into account that the working population and population in general are likely to decrease in the future, from the perspective of securing a labour force, the extension of employment contact for the elderly tends to increase the total labour force and thus this extension is desirable in the long-run. Furthermore, considering that social welfare costs will rise due to Japan's aging population, if the elderly bear some of this burden through their working, the burden to the younger generation will be smaller. Although the upcoming mandatory extension of employment contracts for the elderly will have the short-term demerit of decreasing income levels for those under age 60, I believe that it will have positive long-term impacts on Japanese society.

Yoshihiko Fukushima
Professor, Faculty of Political Science and Economics, Waseda University

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Professor at Faculty of Political Science and Economics, Waseda University. The author graduated from the Faculty of Economics at Keio University in 1988. In 1990, he completed the Master's program (Master of Arts in Economics) at the Graduate School of Economics there and then joined Salomon Brothers Asia, Limited. After work in Tokyo, New York, and London, he completed the Ph.D program at Department of Economics, Stockholm University, Sweden, in 2003. After the post as a professor at Nagoya University of Commerce & Business, he took the present post in 2007.