Fostering job search among older workers: the case for pension reform

The job search demands made upon older unemployed workers in developed economies have traditionally been very relaxed. This has recently changed in some European countries (eg, Germany and Finland), as part of an effort to increase the labor force participation of older workers. Is this new approach appropriate? There is some disagreement among academics about the optimality of this new policy stance. We contribute to this debate by exploring the consequences of institutional reform in Spain, a country with a high rate of unemployment and a tolerant attitude toward the use of unemployment benefits as early retirement income. We develop an applied model of job-search and retirement behavior; calibrate it to the specificities of the Spanish case and successfully verify its empirical validity. We use the model to explore the effects of a change in the pension rules to link early retirement penalties to the age when an individual stops paying contributions. This reform removes the incentives to remain unemployed without searching, encouraging individuals to either retire or actively engage in job seeking. It results in welfare losses, especially for those workers that respond by changing behavior; yet the reform also raises enough extra resources whereby the public authorities may more than compensate all the affected workers.