DP2614 Technical Progress and Early Retirement

Author(s): Avner Ahituv , Joseph Zeira

Publication Date: November 2000

Keyword(s): Technical Progress , Human Capital , Labour Force Participation

JEL(s): J24 , J26 , O15 , O33

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP2614.asp

This Paper claims that technical progress induces early retirement of older workers. It supports this claim both theoretically and empirically. We present a model where part of human capital is technology-specific, so that technical progress erodes some existing human capital. This affects mostly older workers, who do not learn the new technology, since their career horizon is short. As a result their participation in the labour force declines. We find strong support to this erosion effect in US data, which shows that labour supply of older workers is negatively related to technical progress across sectors. Unlike the cross-section effect, the model is ambiguous about the aggregate effect of technical progress on labour participation of older workers. While in sectors with many innovations it falls due to erosion of human capital, in other sectors it increases due to higher wages. To examine which effect dominates, we run a time series test and find that the effect of average technical progress on aggregate labour force participation by the old is negative. Namely, the erosion effect dominates.