Monthly Archives: May 2014

Pension Reforms and Economic Restructuring: Policy Tensions and Implications for Older Workers

Martin O'Brien

Martin O’Brien is the Head of Economics at the University of Wollongong, Australia and a visitor to CERIC during May 2014.

Apprehension surrounding globalisation and the speed in which crises spread and linger had led some countries to consider or reimpose various forms of protectionism in the post GFC years in the hope of insulating their economies from future adverse shocks. However, a few years on and it looks like Free Trade Agreements (FTAs) are back in vogue, at least for Australia, who have announced or formalised agreements with Japan, South Korea and China over the past month. Coinciding with this, Australia’s Treasurer just announced in the May 2014 Budget that Australians will have to work until the age of 70 in the future before they can receive the Age Pension.

On the surface, this makes perfect sense to the neoclassical economist. FTAs are assumed to take advantage of a country’s competitive advantages and abundant resources, allowing an increase in the production and export of goods and services they produce relatively efficiently, reducing the need to produce goods and services in which they are relatively inefficient, and allowing cheap imports benefiting consumers in all participating countries. Similarly, pension reforms advocated by the OECD such as an increase in the age of pension eligibility are intended to combat future strains on government budgets and debt associated with ageing populations. These reforms are high on the agenda of most developed nations’ policymakers, especially in the brave new world of austerity.

A typical byproduct of FTAs is that they are likely to be a catalyst for economic restructuring, generally entailing the demise of traditional manufacturing in developed countries. Numerous studies of workforce redundancies in the manufacturing sector have shown that older workers tend to experience the poorest labour force transitions in terms of the likelihood and speed of re-employment. Yet they are being told at the same time that they must now work until an older age.

Results from a study of the post-redundancy experience of BlueScope steelworkers from Port Kembla in Australia reinforce the uphill battle that policymakers will face in forcing older workers to remain in the labour force until older ages. In August 2011 BlueScope Steel announced that due to record financial losses they were exiting the steel export market, shutting down one of two remaining blast furnaces, and resulting in the loss of 800 BlueScope workers and approximately 400 contractors who regularly worked at the site. BlueScope cited high exchange rates and raw materials costs as contributing factors to the decision, ironically linked to the mining boom experienced in Australia with record exports of coal and iron ore to Chinese steel producers.

Survey results showed that only 40% of the workers redundant from BlueScope were employed 6 months later, 26% unemployed, with the remainder mostly retired. Looking at the statistics by age group we saw that only 31% of those aged 55-59 were re-employed, sinking to 19% for those 60-64. Of the unemployed, 83% attributed age as the major barrier to their re-employment, followed by unavailability of jobs in the local area. In addition, almost half of those that retired expressed a desire to be employed if a suitable job was available. Another survey conducted about 18 months after redundancy showed that 17% were still unemployed, all of whom were above the age of 45. At this stage their average duration of unemployment over the 18 month period was 16 months. Not surprisingly, 78% believed that their unemployment would be long term.

The ex-steelworkers had been provided with relatively costly assistance by various government agencies, obviously to no avail for the hard core unemployed. A fund of $10m (= approx. £5m) had been set aside by the Federal Government to Job Service Providers with the workers automatically placed on “stream 3” which entailed an individual case manager, $3k jobseeker account for tools, equipment or retraining, $9k relocation allowance, and subsidies to employers taking them on. In addition, a $30m fund had been set up to create sustainable jobs in the local region in an attempt to diversify the economy and job base. In a controversial twist, a media report by the national broadcaster ABC blasted the effectiveness of the $30m scheme, with only 2 of the 30 companies receiving funding employing any ex-BlueScope workers.

It therefore appears as if there are significant barriers to be addressed in the labour market if we are to extend the working lives of the older population. Other research in OECD countries shows that pension reforms have a very limited effect on increasing older worker labour force participation rates (LFPR) compared to labour market variables and that there is an asymmetric relationship between older worker LFPR and the state of the labour market. That is, when unemployment in an economy increases, older worker LFPR decreases by a larger margin compared to the increase in LFPR derived from a decrease in unemployment. This implies that there is a large discouraged worker effect present in many countries and a significant amount of older worker hidden unemployment concealed behind official statistics.

In summary, economic restructuring will likely increase in intensity as countries like Australia pursue further Free Trade Agreements and associated trade liberalisation. The Shumpetarian concept of creative destruction implies that there will be both winners and losers from this process. However, we have seen that older workers in declining industries are most likely to be the losers in terms of labour force transitions. In conjunction with pension reforms aimed at increasing labour force participation until later ages, older workers are in a particularly vulnerable state. We are likely to observe more older worker displacement and difficulties in labour mobility at a time when increased participation is being called for. Unless due attention is paid to this situation and segment of the population, we shall observe increasing problematic and inequitable outcomes for those approaching retirement and also well into retirement years, largely as a consequence of neoclassical economic ideology.