Older Worker as More Expensive to Employ? – Tell ‘em They’re Dreamin’
The Misconception
In absolute financial terms data supports a view that older workers are more costly for a business to employ than their younger counterparts. A 2015 AARP Report detailing a business case for workers aged 50 and over acknowledged that employees over the age of 55 are in fact between 1% and 10% more expensive than younger workers to hire. Yet to think in such a one-dimensional way is to miss the point about older workers and their value. The key question is whether wages rise faster than productivity for any given worker. According to a EU report, “there is no empirical evidence that older workers are more or less productive than other age groups” (European Commission, 2003).
Lost in the translation of this simplistic headline of older worker financial expense into a broader business consideration is the ignoring of the complexity of work roles older workers may be performing, the experience needed to perform these roles, the belief that older workers retain significant labour market bargaining power and the disregard of business cost offsets the older worker provides. As we are coming to learn in our articles exploring older worker misconceptions, a statement containing a small element of truth becomes misconstrued or misrepresented to create a false impression that ignores actual evidence about the value and capability of the older worker. Let’s correct the record regarding older worker expense.
Debunking the Misconception
Wages for older workers, at a macro level, in fact actually trail younger worker wages:
A 2019 report by Schwartz Centre for Economic Policy Analysis revealed older workers’ wages have trailed younger workers’ wages for roughly the past three decades. From 1990 - 2019, the median wages for men aged 55+, with a bachelor’s degree, decreased by 2.9%. Conversely, wages for men aged 35-54, with a bachelor’s degree, increased by 8.7%.
A 2019 Bankrate survey found that as workers age the worse their wage outcomes become. Half of workers aged 55-64 did not get a pay increase in the past 12 months, whilst workers aged 65-73 fared even worse with 3 in 5 not receiving a pay increase.
The implementation of pay for performance policies has replaced employee age considerations as the prime determinant of wage levels. Contrary to common perceptions, older workers do not cost significantly more than younger workers. Older worker salary premiums are justified on the complexity of the roles they perform and their performance in delivering results.
For male workers with college degrees, the ratio of wages for those ages 55-60 relative to those ages 30-35 has narrowed substantially over the last 40 years. Part of the narrowing between older and younger workers is due to an increasing number of large employers shifting to performance- based compensation structures. 90% of large companies now use performance-based variable compensation rather than only tenure-based compensation - an increase from 78% in 2005. A shift from defined benefit superannuation arrangements to accumulation-based ones also has a major impact on reducing older worker business expense.
The extent to which wages continue to be higher for older workers can be explained by the fact that older workers are doing harder jobs. A study from the St. Louis Federal Reserve shows that, as workers age, they take on jobs that require more intensive social, verbal, and math skills. A European study also confirmed that higher wages in the later career of workers reflect the investments in skills during earlier years and an experience premium as these skills are understood as unique and contribute to increased individual productivity. Simply, wages grow with seniority because productivity grows with seniority.
Analysis reveals that compensation and length of service are more closely correlated than are compensation and age. The more experience an individual has in a role, generally speaking, the greater the level of competency and proficiency and the higher the compensation.
Older workers continue to provide significant cost-saving benefits to employers by their presence in the workplace.
Empirical research has revealed older workers stay in jobs longer than younger workers, have higher levels of work commitment, are more reliable and less prone to absenteeism whilst also demonstrating the ability to acquire new skills and be creatively innovative.
Data shows workers aged over 55 are five times less likely to change jobs compared with workers aged 20-24 thus reducing ongoing recruitment and training costs.
Rates of absenteeism are lower, so there is a greater investment return on their training.
Practitioner evidence reveals today’s young workforce more aggressively explores new job opportunities than older generations, which in the case of the American economy by example, is costing over 30 billion dollars per annum in employee turnover costs.
The reality for many older workers seeking employment is that they have little bargaining power in the labour market. A need to work as a result of inadequate retirement security and the reality of increased job instability sees many older workers willing to pursue work opportunities at lower job and wage levels than they once might have commanded. A ‘peg down’ spiral phenomenon has been observed. Unable to secure employment at the same level, older workers take the next ‘peg down’ to try for jobs at a lower level. If they then lose a job at this level, employers tend to look at the most recent employment, ignoring previous skill sets, thus pushing the same older worker to again aim a little lower than their last job. A progressive downward spiral in job status and wage levels becomes real for many older workers. Rather than being a more costly resource for employers, the opposite is more accurate with older workers often lacking leverage in improving their wages and working conditions.
How Such a Misconception Maybe Harming Your Business
AARP (a not-for-profit US–based interest group with over 38 million members which focuses on issues affecting those over the age of fifty) argues a ‘net positive” business case exists for having a focused strategy to retain and hire more workers aged 50 and over. Any extra small incremental labour costs associated with older workers are more than offset by their higher engagement, knowledge and skills accumulated over a career and the attrition costs saved through lower unplanned turnover.
Companies, thinking creatively, also understand not all older workers want full-time roles or to be managers again. Cost offsetting opportunities then exist to access significant older worker expertise through the offering of flexible work hours, contract positions or other work structures that may be mutually beneficial for companies and older workers alike.
The evidence is showing older workers as a major cost impediment to business is greatly exaggerated and relies on a small sliver of financial evidence divorced from business reality. As age-related costs are limited, employers can get productivity boosts through populating their workforces with more older workers with a minimal impact on total labour cost.
If the above facts have made you reflect on your workplace dynamics, please contact us and let us help you take practical steps to transform your existing workplace into an inclusive age neutral one that develops your competitive and performance capability.
Selected References
A Business Case for Workers Age 50+: A Look at the Value of Experience (2015). AARP. https://www.aarp.org/content/dam/aarp/research/surveys_statistics/general/2015/business-case-workers-age-50plus.doi.10.26419%252Fres.00100.001.pdf
The Business Case for Older Workers. (2019) https://crr.bc.edu/wp-content/uploads/2019/02/The-Business-Case-for-Older-Workers.pdf
Cardoso, A.R., Guimarães, P. & Varejao, J. (2010) Are Older Workers Worthy of Their Pay? An Empirical Investigation of Age-Productivity and Age-Wage Nexuses. Discussion Paper No. 5121. https://docs.iza.org/dp5121.pdf
de Hek, P. & van Vuuren, D. (2011). Are older workers overpaid? A literature review. Int Tax Public Finance 18, 436–460 DOI 10.1007/s10797-011-9162-3
Ferguson, G. (2020). Older workers’ wages are declining. (March 17). https://exclusive.multibriefs.com/content/studies-older-workers-wages-are-declining/business-management-services-risk-management
IMIDataSearch. (2017). The Reality of Employee Turnover Among Millennials. Retrieved from https://imidatasearch.com/employee-turnover-among-millennials/
Mayhew, K., & Rijke, B. (2004). How to Improve the Human Capital of Older Workers or the Sad Tale of the Magic Bullet. https://www.oecd.org/els/emp/34932028.pdf
Peterson, S.J., & Spiker, B.J. (2005). Establishing the Positive Contributory Value of Older Workers: A Positive Psychology Perspective. Organizational Dynamics, Vol. 34, No. 2, pp. 153–167
Ranzijn, R., Carson, E., Winefield, A.H., & Price, D. (2006). On the scrap-heap at 45: The human impact of mature-aged unemployment. Journal of Occupational and Organizational Psychology, 79, 467–479
Wiczer, David. 2015. “It’s the Older Workers Who Have the Job Skills.” On the Economy series. St. Louis, MO: Federal Reserve Bank of St. Louis. https://www.stlouisfed.org/on-the-economy/2015/december/workers-take-jobs-requiring-more-skill
