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Age Discrimination Laws and Labor Market Efficiency

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  • David Neumark
  • Wendy A. Stock

Abstract

In Lazear's (1979) model of efficient long-term incentive contracts, employers impose involuntary retirement based on age. This model implies that age discrimination laws, which bar involuntary terminations based on age, discourage the use of such contracts and reduce efficiency. Alternatively, by making it costly for firms to dismiss older workers paid in excess of their marginal product, such laws may serve as precommitment devices that make credible the long-term commitment to workers that firms must make under Lazear contracts. Given that employers remain able to use financial incentives to induce retirement, age discrimination laws may instead strengthen the bonds between workers and firms and encourage efficient Lazear contracts. We assess evidence on these alternative interpretations of age discrimination laws by estimating the effects of such laws on the steepness of age-earnings profiles. If long-term incentive contracts are strengthened or become more prevalent, average age-earnings profiles should steepen for workers who enter the labor" market after age discrimination laws are passed, and vice versa. The empirical analysis uses decennial Censuses of Population and state-level variation in age discrimination laws induced by state and federal legislation. The evidence indicates that age discrimination laws lead to steeper age-earnings profiles for cohorts entering the labor market, suggesting that these laws encourage the use of Lazear contracts, and increase efficiency.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6088.

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Date of creation: Jul 1997
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Publication status: published as Journal of Political Economy, Vol. 107, no. 5 (October 1999): 1081-1125.
Handle: RePEc:nbr:nberwo:6088

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Cited by:
  1. David Neumark, 2008. "The Age Discrimination in Employment Act and the Challenge of Population Aging," NBER Working Papers 14317, National Bureau of Economic Research, Inc.
  2. David Neumark, 2003. "Age Discrimination Legislation in the United States," Contemporary Economic Policy, Western Economic Association International, Western Economic Association International, vol. 21(3), pages 297-317, 07.
  3. Elda Pema, 2010. "The Effect of Age Discrimination Laws on Age-Earnings Profiles of Postsecondary Faculty," Atlantic Economic Journal, International Atlantic Economic Society, International Atlantic Economic Society, vol. 38(1), pages 65-80, March.
  4. Murrugarra, Edmundo, 2011. "Employability and productivity among older workers : apolicy framework and evidence from Latin America," Social Protection Discussion Papers 63230, The World Bank.
  5. Christine Jolls, 2007. "Employment Law and the Labor Market," NBER Working Papers 13230, National Bureau of Economic Research, Inc.
  6. Nick Adnett & Stephen Hardy, 2007. "The peculiar case of age discrimination: Americanising the European social model?," European Journal of Law and Economics, Springer, Springer, vol. 23(1), pages 29-41, February.
  7. David Neumark & Joanne Song, 2011. "Do Stronger Age Discrimination Laws Make Social Security Reforms More Effective?," NBER Working Papers 17467, National Bureau of Economic Research, Inc.
  8. Paul Oyer & Scott Schaefer, 2002. "Litigation Costs and Returns to Experience," American Economic Review, American Economic Association, American Economic Association, vol. 92(3), pages 683-705, June.
  9. Paul, Maureen, 2006. "A cross-section analysis of the fairness-of-pay perception of UK employees," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, Elsevier, vol. 35(2), pages 243-267, April.
  10. Pfeifer, Christian, 2009. "An Intra-Firm Perspective on Wage Profiles and Employment of Older Workers with Special Reference to Human Capital and Deferred Compensation," Hannover Economic Papers (HEP), Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät dp-413, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  11. Daniel, Kirsten & Heywood, John S., 2007. "The determinants of hiring older workers: UK evidence," Labour Economics, Elsevier, Elsevier, vol. 14(1), pages 35-51, January.
  12. Vere, James P., 2011. "Social Security and elderly labor supply: Evidence from the Health and Retirement Study," Labour Economics, Elsevier, Elsevier, vol. 18(5), pages 676-686, October.
  13. Christian Pfeifer, 2009. "Adjustment of Deferred Compensation Schemes, Fairness Concerns, and Hiring of Older Workers," Working Paper Series in Economics, University of Lüneburg, Institute of Economics 151, University of Lüneburg, Institute of Economics.
  14. Adams, Scott J., 2004. "Age discrimination legislation and the employment of older workers," Labour Economics, Elsevier, Elsevier, vol. 11(2), pages 219-241, April.
  15. Dorota Witkowska, 2013. "Gender Disparities in the Labor Market in the EU," International Advances in Economic Research, Springer, Springer, vol. 19(4), pages 331-354, November.

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