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KDI Policy Forum
The Effects of Delayed Mandatory Retirement on Elderly and Youth Employment

May 14, 2020

  • Author HAN. Joseph
  • Series No. KDI Policy Forum No. 277 (2020-02), eng.
  • Language English
PDF
KDI Policy Forum
The Effects of Delayed Mandatory Retirement on Elderly and Youth Employment

May 14, 2020

  • Author HAN. Joseph
  • Series No. No. 277 (2020-02), eng.
  • Language English
PDF
    1. Necessity and Concerns

    2. Phased Increase in the Mandatory Retirement Age

    3. Empirical Analysis of the Impact of the Retirement Age Extension

    4. Impact to Private Firms

    5. Impact to Public Institutions

    6. How Should We Proceed?
KDI Report VOD
The working age population began to decline in number in 2018, as the population rapidly ages.

Accordingly, address the labor shortage, efforts are needed to delay retirement.

So, can people actually work longer if the mandatory retirement age is raised?
If there are more jobs for seniors, won’t the younger generations lose out?

To answer these questions and many more, KDI conducted an analysis of the changes brought on by the introduction of the minimum retirement age at 60, by using administrative data on employment insurance.

After the extension of the mandatory retirement age, or MRA, was implemented in 2016, over half of all firms raised their retirement age from mid-50s to 60.

This increased the employment of seniors, especially in large companies.
But, the more senior employment grew, the more youth employment contracted.

More importantly, as the MRA increased by a bigger margin, the younger generation had access to fewer jobs.

This means that there is a clear causal relation between MRA extension and youth employment.

On the other hand, public institutions saw an increase in both their senior and youth
employment.

This was possible because public institutions, which were already mandated to have 3% of their labor force occupied by young workers, implemented the MRA extension concurrently with the peak wage system.

The peak wage system essentially allowed organizations to downwardly adjust the wages of older workers nearing retirement, and use the residual to pay their younger employees.

But, this approach is not without fault.
It reduced the employment of workers in their 40s, whose jobs remained unfilled due to their decreased capacity to recruit experienced workers.

Then, what should be done?

Considering the rate at which the population is aging, an extension of the retirement age is definitely needed. But, if it is done by a sudden increase of the minimum, private companies will become excessively burdened. This will lead to early retirements and forced resignations, and above all, cut new hirings.

In an effort to minimize the negative effects, the MRA should be gradually raised to allow time for the labor market to absorb the shock.

Additionally, senior workers who are not protected until the MRA, mostly in SMEs and non-regular contracts, should be supported by employment service and job creation well-suited to their needs.
■ The phased implementation of the minimum mandatory retirement age (60) from 2016 has expanded the employment of older workers (55-60) but reduced that of young workers (15-29). The negative effect has been particularly pronounced at large companies or firms with a previously low official retirement age.

- A difference-in-difference analysis at the establishment level reveals that a 1 person increase in those who could potentially stay owing to the new mandatory retirement age leads to a 0.6 person increase in older workers and a 0.2 person decrease in young workers.

- The decline in youth employment was marked at establishments with 100+ employees or those whose retirement age was 55 or below before the statutory change.

■ These results imply that a gradual approach is required to minimize the negative impact of delayed mandatory retirement, and that additional labor market policies are needed particularly for older workers whose employment is not protected.

- Increasing the mandatory retirement age is necessary given the rapidly aging population, but the negative impact on employment can only be minimized if it proceeds slowly and in phases.

- Employment services tailored to older workers should be provided, particularly for those whose retirement age is not guaranteed, and legal standards need to be improved to facilitate the creation of jobs with flexible hours.
 
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