Older workers, pension reforms and firm outcomes

Using Italian matched employer–employee data, this paper quantifies the effect of an exogenous increase in older workers, driven by an unexpected increase in the statutory retirement age, on the input mix and economic outcomes of medium and large firms. Data on lifetime pension contributions are used to calculate the unexpected additional number of older workers retained by each firm as a result of the pension reform. Instrumental variable estimates show that an increase in the number of older workers leads to a precisely estimated rise in the employment of younger workers, value added and total labor costs relative to less affected firms, holding average labor productivity and unit labor costs constant. The effect is stronger and mostly concentrated in larger firms and in firms where older workers are scarcer, suggesting the existence of firm-specific human capital that generates replacement frictions that the pension reform can alleviate.