Sunday, February 19, 2006

Age discrimination

I'm 55 and increasingly, the senior clients I deal with are younger than I am.

People in their fifties and sixties complain of age discrimination in employment, and consequentially lobby for regulation. Governments try to raise the pension age for all the well-known reasons, which promises to make the problem of ageism worse. But perhaps market mechanisms can solve the problem?

Suppose a senior worker is just as productive now as they were twenty years ago. But for 'irrational' (= non-economic) reasons they experience prejudice today, monetarised as $P. What does this mean?

If a thirty-something worker gets paid $W, the fifty-something worker will have to accept pay of $(W-P) for the same job. If they are prepared to take a wage-cut, then problem solved.

Or perhaps not. Maybe seniors don't want to suffer a purely prejudicial wage deficit? Can economics remove the $P differential?

If the job is customer or client-facing, and customers don't like dealing with oldies, then the answer is no. There is evidence that better looking people earn around 15% more in client-facing positions.

If the job is back-room, where real performance rather than bodily-age is important, then employers preferring to hire seniors at $(W-P) should have a preferential cost advantage, which ought to bid $P away in a competitive market.

However, if the source of prejudice is younger fellow employees, then the thirty-somethings may require extra pay to compensate for having to work with or amongst a bunch of geriatrics. This nullifies any price-savings on pensioners, and can perpetuate the discriminatory wages.

The model may be simple, but the lesson for employers is to fight age prejudice amongst their own staff, having first assured themselves that there is no performance basis for it!

There is another angle to this. It is widely noted that over a career, workers are first paid below the true value of their work, while at the end of their careers, workers are overpaid. Various semi-plausible reasons have been advanced for why this is the case: perhaps it serves to minimise employee churn where experience counts? However, in a volatile economy, perhaps the rationale weakens, and older workers will simply have to accept their real market rates. Their peak earnings may then come in mid-career. Another nail in the coffin of final salary pensions.

Note: this discussion is taken from the excellent "Microeconomics the Easy Way”, pp. 265-267, by Walter J. Wessels. It was stimulated by a special article on senior working in The Economist.