Over-Sixties Pushed Into Early Retirement By New Technology

Technical change, which benefits many in the economy by increasing their productivity and incomes, also causes losses to some older workers, who find it too late in their careers to adjust to new technologies. That is the central finding of research by Avner Ahituv and Joseph Zeira, published in the March 2011 issue of the Economic Journal.

Their study finds that a 1% rise in the annual rate of technical change in a given sector of the economy increases the probability of a worker aged over 50 losing their job in that sector by 3%. This effect is stronger for people who are above 60 and almost negligible for people aged between 50 and 60.

Technical progress has been the major engine of economic growth in the last 200 years, since the beginning of the Industrial Revolution. It enabled incomes to rise by more than ten-fold over this period. Technical progress changes continuously the way goods and services are produced. It introduces new goods, new machines and new production methods. Simultaneously, it creates new professions and destroys old ones.

This is where the new study comes in. New technologies frequently make the existing knowledge and skills of workers obsolete as they have to adjust to the new technology. These researchers claim that this erosion of ''human capital'' is harmful mainly to older workers since their career horizon is much shorter.

Hence, it is less beneficial for these workers or their employers to invest in learning the new technologies. As a result, new technologies can lead to loss of jobs by older workers, unemployment and even early retirement.

The researchers test this hypotheses by inspecting the labour and employment histories of a large sample of people above the age 50 from the Health and Retirement Survey in the United States. The workers are then divided according to the sectors they worked in, and analysis conducted of how their labour status is related to technical change in the sector.

The test is not simple since there are potentially two sources of correlation between labour status and technical change within a sector. One is the erosion of human capital, which is the mechanism described by the researchers.

The other mechanism is a result of the fact that many new technologies are not sector-specific but appear throughout the economy, such as developments in information and communications technologies. In that case such technologies raise overall wages and create an incentive for older workers to stay in their jobs.

The research succeeds in disentangling these two effects by identifying technical change that is purely sector-specific. The results show significant support for the theory of erosion of human capital by technical change and its strong effect on older workers.

''Technical Progress and Early Retirement'' by Avner Ahituv and Joseph Zeira is published in the March 2011 issue of the Economic Journal.