1 September 1999

US Faces an Age-Quake in the Work Force

The following article is excerpted from "The Journal of Commerce" edition of 1 September 1999.

Some numbers just hit you in the face. The U.S. labor force is projected to keep growing, reaching
149 million in 2006.

There's nothing earth-shattering about that, but wait: almost all of this growth is coming from people aged 45 and over.

The number of workers 25 to 44 years old is actually shrinking, while the fastest-growing group of American workers comprises those in their late 40's and early 50's. Not surprisingly, the median age of the labor force is set to reach an all-time high by 2006....

Women's participation rates are certainly rising, but this essentially reflects a long-established trend.

By contrast, men's participation rates are stagnating. About two-thirds of men aged 55-64 are in the work force, a rate unchanged from the start of the 1990's. While this marks a break in the trend to earlier and earlier retirement, it hardly signals a reversal of it. As recently as the mid-1970's, three-quarters of this age group was in the labor force. Just after World War II, the figure was around 90%.

Meanwhile, participation rates for men aged 50 to 54 have fallen in the 1990's, even though this group's educational level has been rising fast as the first of the postwar baby boomers age into this bracket.

If this is the picture in the red-hot American economy today, you have to wonder what will happen when the business cycle heads down, as it surely will.

The incentives and pressures — and also desire — to retire early remain formidable. Indeed, the most common age to retire is now 62, despite the fact that early retirees receive Social Security benefits worth a fifth less than what they would get at age 65.

The incentives to quit include not just Social Security checks but also private pensions. Half of full-time employees in large and medium-sized private establishments are members of defined benefit plans. These often allow for early retirement on generous terms.

Why aren't companies making greater efforts to tap into the newly abundant source of older workers? One reason is that health insurance costs and time off for sickness both rise with age. Employers also worry about the ability of older staff to pick up new skills, particularly in information technology.

Still, older workers are often rated as more diligent and are less likely to jump ship, making retraining more feasible for companies. I suspect, however, the real reason for the reluctance of employers to embrace an aging work force is more fundamental: most large firms remain hierarchical despite all talk to the contrary. And age remains a key dimension to corporate hierarchy. This makes it difficult to motivate a bulge of older employees that distorts the natural pyramidal shape of companies.

There are now more workers in their late 40's than in their late 20's. As recently as 1990, there were two in the former group for every three in the latter, while back in 1980 the ratio of workers 45 to 49 years old to those 25 to 29 stood at one to two.

This math cuts both ways. Who doesn't dream of early retirement when stuck in a traffic jam or jostled on the subway on the way to work? Who wants to stay in a Dilbert cubicle if you can afford to break out? With rising wealth, an increasing number of people can live the dream.

Those who are most highly educated and therefore best able to cope with today's labor market are the ones most able to afford early retirement. Often, however, the reality of early retirement bears as much resemblance to the dream as a holiday does to the travel brochure.

If companies and aging baby boomers are to adapt successfully to the seismic age shift in the labor force, there will have to be a work makeover. Companies should come up with creative solutions when confronted with a surplus of middle-aged staff. Instead of the indiscriminate downsizing of the past few years, they should actively seek to build links