EUROPEAN PAPERS ON THE NEW WELFARE

4. Demand and supply interactions: the human capital gap

Having noted the importance of supply and demand interactions, it is important to briefly describe what the demand conditions for elderly people are. The basic element to be considered is the large educational attainment gap of the cohorts currently in their fifties. This is mostly an historical fact, as mass scholarization in Italy is a relatively recent phenomenon. In 1991, the 55-64 years group had on average 5.7 years of completed schooling, compared to the 10 years of the 25-34 year-olds. Simply because of past historical trends, in 1999 the gap (involving the same age groups and different cohorts) had slightly reduced to a 6.8-10.9 difference and further reductions are likely in the years to come as in the same year people aged 45-54 had on average 9.1 years of completed schooling (and trends in current schooling participation have almost halted).
Incidentally it has to be noted that educational attainment matters in relation to retirement for at least two reasons. The first reason, and the one here specifically considered, is that human capital matters to employability. There is also a second reason more related to the role of age and seniority requirements previously discussed as more educated people had a later start in the labour market and are likely to have accumulated, for any given age, less seniority years. Actually, this element has contributed (and will contribute in the years to come) to the shifting up of the effective age of retirement¹⁵.
What about the future? May one assume that — whatever the aggregate effects of the reduced path of increase in educational attainment of newer and smaller cohorts16 — the future human capital gap of the elderly will be reduced? Discussing such an issue is beyond our aims in this short note. However, some prudence appears necessary.
One should consider that in the so-called knowledge-based economy of the future the risk of obsolescence of the skills acquired at school is increasing. The Italian economy would so suffer from the forthcoming elderly people bulge and in it the elderly would be clearly the ones most at risk. Actually, in order to characterize the human capital gap of the elderly one should also take into account the role of learning activities beyond initial education. To put it succinctly, the Italian case is one in which not much training takes place on average. Moreover, training participation is very much tilted in favour of the young and more educated people.

5. Demand and supply interactions: working conditions and business practices

The human capital gap described above should reduce the (relative) demand for the elderly by firms. Does it translate into lower wages or, in the case of given wages, in worse employment opportunities? In a rather institutionalized labour market like Italy, such a simple price-quantity decomposition does not appear directly visible. The role of market forces in shaping wages is indirect as business practices, fairness considerations and contractual arrangements through unions’ bargaining heavily affect the process.
While less relevant than in the past, explicit and formalized tenure rules often impact upon wages. From a firm’s perspective it is so often the case that high-tenured elderly workers appear as an unjustified burden, while elderly unemployed would get (on the external market) low wages which are unattractive, both in themselves and because of the associated future pension reductions (see section 3). All in all, it seems that wages have an age gradient which is quite sizable, probably also because of selectivity issues, as the least skilled and the most unlucky people tend to retire as soon as possible.
Less clear is the picture concerning non-wage working conditions. Do stress factors — assuming a normal decay of health, physical strength and capability to manage stressing situations — somehow induce many elderly people to retire (as soon as possible)? Would the presence of these factors induce an increase in disability and health related benefits’ claims as a reaction to possible toughening of pensions’ access rules?
Apparently, there is not much evidence of an age-related pattern in overall job satisfaction¹⁷. Elderly workers do not appear to be more dissatisfied than others. However, this might be due to selectivity as those more dissatisfied, because less motivated and/or with health problems and difficulties in adapting to work-place rules, may have exited relatively early.
Here we are unable to quantify the relevance of these issues. Yet it has to be noted that so far little care has been given to the adaptation of the working place to the specific needs of elderly workers. This may be due to the escape route provided by seniority pensions relieving firms and workers (and unions) from the difficult task of agreeing upon possible solutions. To some extent, demographics were also operating in the same direction, as the abundance of younger workers made the difficult task of being attractive to the elderly less relevant to firms. More broadly, one can say that the small size of most Italian firms puts them at a disadvantage in putting into place flexible arrangements different from the widespread use of overtime, a practice which is not very elderly-friendly.
Specularly, one has to stress the importance of rigidities in the organizational set-up as an obstacle to the diffusion of part-time. These difficulties have contributed to the fact that gradual retirement and part-time solutions are of little relevance to the elderly.

6. Demand and supply interactions: labour market rules and policies

In the previous sections we have shown how wage determination and the human capital gap interact in reducing elderly employment chances. More broadly, one can say that the traditional labour market regulatory framework has tended to exacerbate the insider-outsider dilemma among elderly people. In Italy the Employment Protection Legislation (EPL) for permanent workers still remains quite strong; this provides protection for the elderly when employed. When unemployed, however, not much help is provided in order to get people back to work. It was quite customary for the elderly to be expected to exit from the labour market taking advantage of the seniority pension route.
As is well known, the overall EPL index for Italy as constructed by the OECD has seen a sizable decline over the last 15 years. This was however entirely due to the flexibility gradually introduced at the fringes of the market, through the relaxing of temporary contracts rules. The point is that all this has mostly impacted on the youth market segment. This is so both because some temporary contracts were specifically targeted to the young (moreover the provision of a social security contributions rebate exacerbated the problems evidenced in the previous section) and because most of the employment services developed by private agencies have focused upon the most relevant (from their business perspective) youth segment.
On the other hand, reinsertion services focusing upon weak groups, including the elderly, are still quite underdeveloped in a framework in which the Public Employment Services (PES) have not developed any strong ‘activation’ attitude.
It is quite difficult to provide forecasts in this area. Broadly speaking, a more flexible labour market might make easier those labour market reinsertion opportunities which so far have been lacking resulting in people being pushed towards one pension-related exit route or another. However, maintaining a ‘flexibility at the fringes’ model may be problematic as the elderly are the least accustomed to take advantage of it.
More specifically, ambiguous trends appear in some cases. As for employment incentives, for instance, a new scheme specifically focusing upon reinsertion difficulties has been just introduced (the so-called contratti di inserimento — CIL — which target the elderly among others). However, the bulk of the expenditure still covers the young and the same law introducing the CIL has also widened the scope for the use of apprenticeship schemes, making them an almost universally available (low-cost) employment contract for the young. As for the employment services, focusing upon elderly people is likely to become — also for the demographic reasons stated above — a business case for the private employment agencies whose presence has recently become well established. However, the delays in the difficult transition towards an activation role on the part of the PES may still limit the capability of labour market institutions to provide support for the elderly. Within the few good practices developed in the PES, the attention paid to the elderly is still very episodic.

References
Diamond Peter, 2005, “Social Security Rules that Vary with Age”, in Fornero Elsa and Paolo Sestito, eds., Beyond Mandatory Retirement, Edward Elgar.

Fornero Elsa and Paolo Sestito, 2005, “Introduction”, in Fornero Elsa and Paolo Sestito, eds., Beyond Mandatory Retirement, Edward Elgar.

Marano Angelo and Paolo Sestito, 2005, “Retirement Age Rules and Pension Reforms in Italy”, in Fornero Elsa and Paolo Sestito, eds., Beyond Mandatory Retirement, Edward Elgar.

Sestito Paolo, 2002, Il mercato del lavoro in Italia, Bari-Roma, Laterza.

15 An additional element is that youth unemployment has been particularly high since the mid 1970s, so that future cohorts of people faced with retirement choices will have accumulated less years of seniority after the completion of schooling.
16 The reduced path of increase in educational attainment and the reduced size of cohorts are possible sources of concern because they would imply a reduced increase in the aggregate supply of skills. Additional concerns may derive from quality considerations, related not to educational attainment per se but the actual content of schooling background as for instance evidenced by the disappointing results of the PISA exercise conducted under the auspicies of the OECD in 2000 and 2003.
17 See on this Sestito (2002), chapter 7.

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