Closing the Retirement Door and the Lump of Labor

Economists are active militants against the popular idea that the number of jobs is fixed. Standard price theory suggests that this lump of labor concept is indeed a fallacy. Even when capital is fixed in the short run, and... [ view full abstract ]

Economists are active militants against the popular idea that the number of jobs is fixed. Standard price theory suggests that this lump of labor concept is indeed a fallacy. Even when capital is fixed in the short run, and labor supply is rigid, changes in the retirement age are totally offset by wage adjustment. Yet, under short-run wage rigidity and with labor demand determined, an unexpected locking-in of older workers, associated with a partial closing of the retirement door for older workers, may affect youth employment.  We take Italy as a case study as a major reform took place in December 2011 increasing the retirement by up to six years for some categories of workers. We  identify in each private firm the fraction of workers locked-in by the sudden increase in the retirement age, and for how long. Our results indicate that an increase in the number of locked-in workers has indeed crowded out the youth. Quantitatively, the policy change accounts approximately for 60 percent of the reduction in youth employment among affected firms.