What Does Human Capital Do to Labor Force Participation of Older - PDF document

What Does Human Capital Do to Labor Force Participation of Older Women? Haodong Qi ∗ a and Tommy Bengtsson b,c,d a Stockholm University Demographic Unit b Centre for Economic Demography, Lund University c IZA d Centre for Economic Policy Research (CEPR), London Abstract Labor force participation (LFP) of older women has been rising in many developed coun- tries since the mid-1990, its causes however have not been well understood yet. This paper determined the extent to which the trend increase in LFP of older women in Swe- den can be explained by human capital development, namely the improvement in average education attainment of the retirement-age population. Our findings suggest that educa- tion played an important role in driving the growth of older women’s labor supply, which is predominately mediated by a remarkable increase in their earning capacity. On the contrary, although average education of older men has been significantly improved, this development explained little of the trend increase in their LFP. JEL Classification: H55, I25, J26 Keywords: Education, Human Capital, Labor Supply, Older Women ∗ Correspondence: Haodong.Qi@sociology.su.se 1

1 Introduction Older worker’s labor force participation (LFP) has been rising in many developed coun- tries since the mid-1990s. Effective retirement age, on average, increased from 63.2 to 64.6 for men during 1998-2014 across 34 members of OECD; this growth is even steeper for women, from 61.1 to 63.2 1 . While the existing literature mostly suggested that in- terventions, such as raised statutory pension age, and/or financially discouraging early retirement, played an important role, many studies did not fully explain the overall in- creases in LFP, see for example Staubli and Zweimuller (2013); Manoli and Weber (2016); Atalay and Barrett (2015); Cribb et al. (2013); Pingle (2006); Mastrobuoni (2009); Hanel and Riphahn (2012); Karlstr¨ om et al. (2008); Glans (2008). Some even showed that the magnitude of these policy effects is very much in doubt (Qi et al., 2016; Qi, 2016). This paper seeks to understand what else (besides changing retirement policy) might explain the recent increase in retirement age. Specifically, we examine the extent to which human capital development has driven the growth in LFP of older workers. Heckman (1976) argue that there are two pathways through which initial human cap- ital endowment may affect labor supply. First, it may increase labor supply through a substitution effect of greater earning capacity. Second, it may reduce work activities due to an increase in demand for effective leisure (given that leisure is a normal good). However, the leisure and substitution effects offset each other, hence the net labor supply effect of an increase in human capital endowment is unsigned. As noted by Heckman (1976), substitution effect tends to outweigh leisure effect at younger age due to steep wage growth over early life cycle, whereas the leisure effect might dominate at older age because the endowment effect on earning capacity diminishes by age (in the presence of human capital depreciation). However, the existing empirical literature generally suggest that the net effect of greater human capital endowment still remain at older age, as many have shown that high-educated workers tend to retire later, compared to low-educated (B¨ orsch-Supan et al., 2009; Buchholz et al., 2013; Glans, 2008; Klevmarken, 2010; Komp et al., 2010; Larsen and Pedersen, 2013; Stenberg and Westerlund, 2013). Nevertheless, the existing empirical evidence seldom distinguish between the substitution and leisure 1 Source: OECD estimates based on the results of national labour force surveys, the European Union Labour Force Survey, and, for earlier years in some countries, national censuses. Note: data is available at: http://www.oecd.org/els/emp/average-effective-age-of-retirement.htm 2

effect of an increase in human capital endowment. In this paper, we identify these two effects, respectively. Tertiary education was expanding during the second half of the 20th century world- wide (Altbach et al., 2009). Many birth cohorts who were early beneficiaries from these expansions have now reached their pensionable age. This led to a trend increase in the average education of retirement-age population over the past two decades. If the net labor supply effect of education remain positive at older age, we would expect to see a contribution of growth in older workers’ human capital endowment to the trend increase in their LFP. While this development may seem obvious to explain the rising retirement age, the existing empirical literature has rarely examined such a relation. To the best of our knowledge, only two studies have showed that the growth in educational attain- ment can explain a substantial part of the recent increase in older men’s LFP (Blau and Goodstein, 2010; Schirle, 2008). However, neither of these two studies provide insights into what drives the growth in labor force participation of older women. This paper fills this void. Understanding the trend in older women’s labor supply is of great importance to foresee future development of aggregate LFP. As noted earlier, in many OECD countries, the increase in effective retirement age was more profound among women during the past two decades. If this trend continues, older women may constitute a dominating source of human resource, which is vital for many developed nations to alleviate the challenges of population ageing. Moreover, older women’s labor supply may also have an indirect impact on older men. As Schirle (2008) showed that a large part of the increase in older men’s LFP is attributable to the growth in their wives’ labor supply, due to a so-called “shared leisure effect”. Interestingly, although the rising older women’s LFP may be an important motive for older men to prolong their working life, what encourage older women to work longer is not well understood. While Blau and Goodstein (2010); Schirle (2008) were among the first showing that the growth in educational attainment explained a substantial part of the increase in old- age LFP. Their analyses, however, only covered three countries: the US, the UK, and Canada. This paper adds the evidence from Sweden to this scarce literature. There are two reasons why Sweden is of interest in this regard. First, while tertiary education 3

expansion was phenomenal worldwide during the second half of the 20th century, Sweden is a country that exemplified this process; not only did enrollment and completion rates rapidly increased, but also the number of higher education institutes (Chudnovskaya and Kolk, 2015). This radical development puts Sweden as an interesting case for studying the long-term impact of human capital development on old-age labor supply. Second, Sweden is one of the first four countries in the world introduced Notional Defined Contribution (NDC) scheme in the mid-1990s. Despite the system technically provides strong incentives for late retirement, its implementation in Sweden merely explained 5% of the recent increase in women’s retirement age (Qi et al., 2016). Hence, uncovering what drives the unexplained LFP growth holds important implication for what additional policy options might complement the current pension reform strategy. 2 Data and Method The analysis in this paper relies on Swedish register data. we use the STAR (Sweden in Time: Activities and Relations) collections of data organized by the Demography Unit and the Swedish Institute for Social Research at Stockholm University. The data covers entire population residing in Sweden during the period 1993-2012. The large sample size ensures that we can observe a sufficient number of woman who are still engaging in work activities at older age. As shown in Qi et al. (2016), older workers born after 1937 expected to receive a lower old age pension, compared to older cohorts, due to the 1994 Swedish pension reform. The magnitude of the pension reductions over these notch generations however was not large enough to explain the trend increases in retirement age. Particularly, it merely explained 5% total increase in women’s retirement age. Hence, this paper seeks to uncover what other factors might contribute to a large proportion of unexplained increases. For this, we extract a subpopulation from the register who were born during the period 1937- 1945. The oldest cohort in this study population were unaffected by the Swedish pension reform in 1994, whereas the younger ones were facing a continuous decline in their old age pension benefits. While our primary focus is on older women’s labor force participation (LFP), we include older men throughout our analysis, as a comparison group. 4