For an Age-dependent Personal Training Account

For an Age-dependent Personal Training Account

Not so long ago, British Labour leader Ed Miliband asked the question: ‘is this generation, my generation, going to do right by the younger generation?’ Today’s combination of strikingly high youth unemployment rates throughout most EU countries with on-going financial pressures on pension systems make this concern legitimate. On the face of it, the question is: how to preserve some sort of intergenerational solidarity at a time when young people are both less likely to integrate the labour market and in charge of the (increasing) funding of pension systems?

Not so long ago, British Labour leader Ed Miliband asked the question: ‘is this generation, my generation, going to do right by the younger generation?’ Today’s combination of strikingly high youth unemployment rates throughout most EU countries with on-going financial pressures on pension systems make this concern legitimate. On the face of it, the question is: how to preserve some sort of intergenerational solidarity at a time when young people are both less likely to integrate the labour market and in charge of the (increasing) funding of pension systems?

But we should avoid facile diagnoses and policy options. Showing that a higher employment of older people is compatible with a higher employment of the young is a first step towards thinking a proper solution.

No old country for young men?

According to Eurobaremeter surveys (2009), more than half of European citizens estimate that owing to the fact that older people will have to work longer in the future, fewer jobs will be available for young people. However, attention must be paid to the national diversity that hides under this mean: Cypriots and Greeks are much more prone to support this view (78%) than the British (45%) or the Danes (26%). We have here an apparent correlation between a national situation where youth and overall employment rates have tended to be low by European standards, and a higher support for the ‘crowding-out’ hypothesis (more jobs for the seniors means fewer jobs for the juniors).

Let it be clear. The ‘crowding-out’ view is based on a misled ‘lump-of-labour’ argument (to coin it the OECD way). This argument rests on the following axioms: the number of jobs on a labour market is fixed; younger and older workers are substitutes (not complements), which implies that they all compete for the same positions. But the reasoning is flawed.

For one thing, the entry of additional workers on the labour market creates a downward pressure on wages and increases the pool of profiles employers can select – which contribute to job creation, economists Nicholas Barr and Peter Diamond point out. Second, older workers tend to be over-represented in old industries where they have gained an experience which does not easily fit what the expanding industries look for; the latter are more likely to employ young people, as the OECD remarked. As a matter of fact, the Nordic countries have managed to obtain both youth and senior employment rates above the EU standards. It should be no wonder that the academic literature has not found a negative relationship between senior and youth employments.

The ‘crowing-out’ hypothesis is thus ill-grounded. So are the ‘labour-shedding’ strategies of the 1980s in Western Continental European countries that aimed at getting individuals on retirement earlier in order to increase the number of available jobs (e.g. setting up earlier retirement schemes): they succeeded only in increasing inactivity and unemployment among the seniors (as political researcher Bruno Palier shows us).

To make European pension systems more sustainable, increase employment rates of the young and the over-50

Let us now focus on the problem of ensuring the sustainability of pension systems, which are still largely based on intergenerational solidarity across Europe – and thus put pressure on the labour cost of active workers. Indeed, pay-as-you-go (PAYG) pension systems still account (to various extents) for a large part of pension benefits; they are paid out of current revenue rather than from accumulated funds, which means that they are financed through the contributions paid by current workers out of their gross wages. Consequently, as European population is ageing, financial pressure increases as governments attempt to preserve the system (the European Commission has forecasted that the ratio of working age individuals to the over-65s will decrease from 3.5 today to 2 in 2050). This has created a trend in the past decades either to put up labour costs (by raising the level of social contributions), a disincentive to hiring the low-skilled (who are over-represented among the young unemployed); or to decrease the relative value of pension benefits (impacting the life standards of retirees). Of course raising the pensionable age has also been a frequent strategy – but it tends to widen inequalities between the more skilled and the less skilled (who are more likely to have career paths ‘broken’ by unemployment spells).

One solution to the intergenerational solidarity of PAYG systems can be to increase the employment rate of the active population: it is as much a labour market policy as a pension policy (more people in employment = more pension resources). But it needs not to rest on a neoclassic analysis based essentially on the level of wages. Such an approach would lead to focusing on decreasing the social contributions (or wages) of younger and older workers in order to enhance their employment rate, hereby threatening institutional solidarity with the future generations of retirees (less contribution per employee). It would boil down to an intergenerational zero-sum game.

An alternative analysis considers the current situation of youth (and senior) unemployment according to a ‘matching’ model. In other words, unemployment results partly from a skill mismatch between what the positions require and what the jobseekers possess (especially in a fast-moving economic context). High youth unemployment rates can coexist with persistent skills shortages (shortages of applicants with the right skills) in certain occupations. Pay great attention to this fact: in these days of crisis, European-wide surveys show that more than one in three employers have problems filling vacancies, according to the European Centre for the Development of Vocational Training (Cedefop).

Adequate training of the unemployed is thus crucial.

Aiming for social investment in employment

So why not drawing inspiration from the French Personal Training Account (due to be implemented in 2015)? This instrument enables to accumulate credits in individual right to training for every individual since his/her entrance in the labour market. The account is entirely transferable from one occupation to another and preserved when changing or losing one’s job.

Yet, two other dimensions must be added to this tool. An age-dependent credit allowance is the first one. Being under 25 or over 55 should automatically entitle to a given amount of credits, regardless of the employment record. Its effects would be doubly beneficial. In a situation of unemployment, this right would favour access to the training schemes of job centres (no authorisation to participate in a training scheme would be required; the choice of the training scheme would be the jobseeker’s, not that of public employment services); for active workers, it would enhance the stability of employment through a regular skill updating that is currently mostly offered to long-term employees (at the detriment of the young workers, often in temporary employment). It would at the same time limits skills obsolescence which tend to make the over-50s a priority target when collective dismissals are decided.

Moreover, such credits should be associated with a range of training schemes targeting skill shortages (e.g. in the long-term care sector) at the national level, or at the European one (the Cedefop could lead the prospective work for this would-be continental labour market). Training periods of the young would also count as contribution periods in the calculation of the pensionable age – a way to eschew the double-whammy of unemployment and lack of social contribution record.

Widening access to skill-shortage targeted training seems to be a bold option to maintain an intergenerational solidarity reconciling high employment rates among the youth (and seniors) and the growing financial needs of pension system. The cost of such greater access is yet to be examined. It is nonetheless likely to be inferior to what the destruction of human capital and lack of pension funding today’s jobless masses represent for the future. It is, strictly speaking, a social investment.

Tanguy Séné

Tanguy holds a Bachelor of Arts in European Studies from Sorbonne University, a Master of Arts in European Affairs from SciencesPo and a MSc in European and Comparative Social Policy from the London School of Economics and Political Science. The article was awarded the “Best Paper Award” at the 6th European Public Policy Conference (EPPC) in Rome in partnership with IFAIR.

But we should avoid facile diagnoses and policy options. Showing that a higher employment of older people is compatible with a higher employment of the young is a first step towards thinking a proper solution.

No old country for young men?

According to Eurobaremeter surveys (2009), more than half of European citizens estimate that owing to the fact that older people will have to work longer in the future, fewer jobs will be available for young people. However, attention must be paid to the national diversity that hides under this mean: Cypriots and Greeks are much more prone to support this view (78%) than the British (45%) or the Danes (26%). We have here an apparent correlation between a national situation where youth and overall employment rates have tended to be low by European standards, and a higher support for the ‘crowding-out’ hypothesis (more jobs for the seniors means fewer jobs for the juniors).

Let it be clear. The ‘crowding-out’ view is based on a misled ‘lump-of-labour’ argument (to coin it the OECD way). This argument rests on the following axioms: the number of jobs on a labour market is fixed; younger and older workers are substitutes (not complements), which implies that they all compete for the same positions. But the reasoning is flawed.

For one thing, the entry of additional workers on the labour market creates a downward pressure on wages and increases the pool of profiles employers can select – which contribute to job creation, economists Nicholas Barr and Peter Diamond point out. Second, older workers tend to be over-represented in old industries where they have gained an experience which does not easily fit what the expanding industries look for; the latter are more likely to employ young people, as the OECD remarked. As a matter of fact, the Nordic countries have managed to obtain both youth and senior employment rates above the EU standards. It should be no wonder that the academic literature has not found a negative relationship between senior and youth employments.

The ‘crowing-out’ hypothesis is thus ill-grounded. So are the ‘labour-shedding’ strategies of the 1980s in Western Continental European countries that aimed at getting individuals on retirement earlier in order to increase the number of available jobs (e.g. setting up earlier retirement schemes): they succeeded only in increasing inactivity and unemployment among the seniors (as political researcher Bruno Palier shows us).

To make European pension systems more sustainable, increase employment rates of the young and the over-50

Let us now focus on the problem of ensuring the sustainability of pension systems, which are still largely based on intergenerational solidarity across Europe – and thus put pressure on the labour cost of active workers. Indeed, pay-as-you-go (PAYG) pension systems still account (to various extents) for a large part of pension benefits; they are paid out of current revenue rather than from accumulated funds, which means that they are financed through the contributions paid by current workers out of their gross wages. Consequently, as European population is ageing, financial pressure increases as governments attempt to preserve the system (the European Commission has forecasted that the ratio of working age individuals to the over-65s will decrease from 3.5 today to 2 in 2050). This has created a trend in the past decades either to put up labour costs (by raising the level of social contributions), a disincentive to hiring the low-skilled (who are over-represented among the young unemployed); or to decrease the relative value of pension benefits (impacting the life standards of retirees). Of course raising the pensionable age has also been a frequent strategy – but it tends to widen inequalities between the more skilled and the less skilled (who are more likely to have career paths ‘broken’ by unemployment spells).

One solution to the intergenerational solidarity of PAYG systems can be to increase the employment rate of the active population: it is as much a labour market policy as a pension policy (more people in employment = more pension resources). But it needs not to rest on a neoclassic analysis based essentially on the level of wages. Such an approach would lead to focusing on decreasing the social contributions (or wages) of younger and older workers in order to enhance their employment rate, hereby threatening institutional solidarity with the future generations of retirees (less contribution per employee). It would boil down to an intergenerational zero-sum game.

An alternative analysis considers the current situation of youth (and senior) unemployment according to a ‘matching’ model. In other words, unemployment results partly from a skill mismatch between what the positions require and what the jobseekers possess (especially in a fast-moving economic context). High youth unemployment rates can coexist with persistent skills shortages (shortages of applicants with the right skills) in certain occupations. Pay great attention to this fact: in these days of crisis, European-wide surveys show that more than one in three employers have problems filling vacancies, according to the European Centre for the Development of Vocational Training (Cedefop).

Adequate training of the unemployed is thus crucial.

Aiming for social investment in employment

So why not drawing inspiration from the French Personal Training Account (due to be implemented in 2015)? This instrument enables to accumulate credits in individual right to training for every individual since his/her entrance in the labour market. The account is entirely transferable from one occupation to another and preserved when changing or losing one’s job.

Yet, two other dimensions must be added to this tool. An age-dependent credit allowance is the first one. Being under 25 or over 55 should automatically entitle to a given amount of credits, regardless of the employment record. Its effects would be doubly beneficial. In a situation of unemployment, this right would favour access to the training schemes of job centres (no authorisation to participate in a training scheme would be required; the choice of the training scheme would be the jobseeker’s, not that of public employment services); for active workers, it would enhance the stability of employment through a regular skill updating that is currently mostly offered to long-term employees (at the detriment of the young workers, often in temporary employment). It would at the same time limits skills obsolescence which tend to make the over-50s a priority target when collective dismissals are decided.

Moreover, such credits should be associated with a range of training schemes targeting skill shortages (e.g. in the long-term care sector) at the national level, or at the European one (the Cedefop could lead the prospective work for this would-be continental labour market). Training periods of the young would also count as contribution periods in the calculation of the pensionable age – a way to eschew the double-whammy of unemployment and lack of social contribution record.

Widening access to skill-shortage targeted training seems to be a bold option to maintain an intergenerational solidarity reconciling high employment rates among the youth (and seniors) and the growing financial needs of pension system. The cost of such greater access is yet to be examined. It is nonetheless likely to be inferior to what the destruction of human capital and lack of pension funding today’s jobless masses represent for the future. It is, strictly speaking, a social investment.

Tanguy Séné

Tanguy holds a Bachelor of Arts in European Studies from Sorbonne University, a Master of Arts in European Affairs from SciencesPo and a MSc in European and Comparative Social Policy from the London School of Economics and Political Science. The article was awarded the “Best Paper Award” at the 6th European Public Policy Conference (EPPC) in Rome in partnership with IFAIR.

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