Can a higher retirement age cause unemployment?

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May 31, 2016 by AK

Putin’s principal economic adviser, former economy minister Andrei Belousov, is generally a sensible man, in stark contrast to his colleague Sergei Glazyev, an economic Chavista and a worshipper of the printing press. Speaking of the proposal to raise the retirement age in Russia, up from 55 for women and 60 for men, Belousov has warned that it might lead to redundancies and unemployment. The world, according to him, is on the brink of a major improvement in labor productivity, which will reduce demand for labor. Adding ten million people to the Russian workforce by 2025 will exacerbate the problem, according to Belousov.

Maxim Bouev, professor of economics at the European University in St. Petersburg, has argued in Vedomosti that Belousov is relying on the lump-of-labor fallacy. Bouev’s Oxford PhD may be dated (2006) but is probably still relevant: “Essays on labour markets in Russia and Eastern Europe.”

The essence of Belousov’s concerns is this: a simultaneous increase in labor productivity and the retirement age will lead, in nine years, to a higher unemployment rate in the country. Reasoning in that vein, Belousov is adopting the so-called lump-of-labor fallacy… Indeed, higher labor productivity and a larger labor force could lead to higher unemployment if the country’s economy were not growing, the volume of potential output were fixed and demand for labor were exogenous, that is external relative to the issue in question. However, the central problem is how demand for labor will respond to the situation described.

If labor productivity increases, so does output per worker. If output is constant, firms will need fewer employees. This is the substitution effect that Belousov is talking about. However, the higher labor productivity with unchanged wages means lower costs to producers and new opportunities for higher output. This is the scale effect that Belousov has ignored…

One can understand the concern for higher levels of so-called technological unemployment but the experience of Western Europe indicates that historically, the scale effect has predominated. In other words, higher labor productivity thanks to technological progress has mostly led to economic growth and increasing demand for labor. Moreover, this was accompanied by a reduction in workday hours under pressure from trade unions…

Speaking as an amateur, I feel the focus of this debate may be misplaced. True, Russia’s labor productivity (measured as GDR per hour) is the third-lowest among the OECD members and candidates: above South Africa and Mexico but below Chile. Why? It is tempting to point out the obvious: a large number of Russian workers are structurally unproductive. Bureaucrats, policemen, security guards: most of them add not value but transaction costs. Their continued presence in the workforce will eat into the productivity gains achieved by the others.

Also, plenty of Russians keep working full time after reaching the retirement thresholds of 60/55, while collecting their benefits. Adding several years to that age level will simply strip them of the pension benefits for that period but will not affect their participation in the labor force.


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