Turbulence and the Employment Experience of Older Workers

We provide a joint account of the unemployment and labor force participation patterns of older male workers during the past half-century, and of the role of institutions that have shaped their employment experience. To do so, we build an equilibrium model with labor market frictions, participation decisions and economic turbulence à la Ljungqvist and Sargent (1998). The model explains simultaneously: (i) the fall in labor force participation in the United States, (ii) the similar but more pronounced decline in Europe alongside rising unemployment rates and (iii) the concentration of these adverse employment outcomes on older workers. We show that early retirement benefits combined with stringent employment protection legislation raise tax pressure and discourage job creation in turbulent economic times, and hence that they may have exacerbated the deterioration of European labor markets.