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Looking Back in Anger? Retirement and Unemployment Scarring

Abstract

Unemployment affects future working conditions and job security negatively, thus reducing life satisfaction after reemployment. These employment-related scars of unemployment should not matter anymore when a person has retired. Using German panel data, we analyze unemployed persons’ transition into retirement to test whether unemployment leaves scars beyond working life and thus for reasons that are not employment-related. We find that involuntary unemployment between the last job and retirement causes a loss in life satisfaction after retirement. People who influenced or even initiated unemployment, by contrast, show no scarring. The scarring effect goes beyond what can be explained by the income loss originating from reduced pensions. It shows up independently of whether the unemployment spell directly before retirement was the only experience of unemployment in a person’s career, or whether she had also experienced unemployment at earlier times. We do not find evidence that early retirement or involuntary retirement are the reasons why formerly unemployed retirees display unemployment scarring.

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Notes

  1. According to Bender (2012), unemployed people suffer from retirement because they perceive the transition as more involuntary than employees. In our sensitivity analysis, we test whether this explains the scarring effects by comparing employed and unemployed workers who both were likely forced to retire.

  2. The data are freely provided to academic users by the German Institute for Economic Research (DIW), Berlin (https://www.diw.de/en/diw_02.c.222829.en/access.html).

  3. For most of the time, the statutory retirement age was 65 years. Since 2012, it has been gradually increased and will be 67 years from the 1964 birth cohort onward.

  4. This group mainly comprises people on so-called mini-jobs, who currently earn no more than 450 euros per month and benefit from reduced taxes and social security contributions.

  5. Incomes hardly vary after retirement. Most people mainly rely on the public pension, which cannot fall and increases with wage growth. If we see that a last unemployment spell reduces current monthly income by x euros after retirement, current income will be lowered by x euros in any month after retirement. The drop in current income is thus proportional to the drop in permanent income. Controlling for the change in income when entering retirement thus also captures the effect of the permanently forgone retirement income due to unemployment.

  6. Using propensity score reweighting instead of EB, we find a scarring effect of –0.396 (p < .05) for the combined treatment group of plant closure and other dismissals and –0.486 (p < .01) for plant closures only.

  7. Here, the EB algorithm no longer converges if we consider age at the last episode of employment as a balancing variable, so that the test relies on regressions only.

  8. Because of low numbers of observations for the lag and lead variables, we cannot focus on unemployment due only to plant closure here.

  9. One year dummy variable is left out of the estimation to account for the collinearity of age and the year dummy variables. A regression with age dummy variables instead of age and age squared yields practically the same results.

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Acknowledgments

We thank the Editors and two anonymous referees for their helpful suggestions, and Tom Günther for excellent research assistance. Moreover, we are grateful for comments on a previous version to C. Katharina Spieß; Reto Odermatt; and participants of the SOEP seminar at DIW Berlin (2013), the IAAEU seminar at the University of Trier (2013), the annual conference of the German Economic Association, Hamburg (2014), and the IAB conference Labor Market Prospects of Older Workers, Nuremberg (2014). Clemens Hetschko and Ronnie Schöb acknowledge financial support by the German Science Foundation (DFG) through Project SCHO 1270/5-1.

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Hetschko, C., Knabe, A. & Schöb, R. Looking Back in Anger? Retirement and Unemployment Scarring. Demography 56, 1105–1129 (2019). https://doi.org/10.1007/s13524-019-00778-2

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Keywords

  • Retirement
  • Life satisfaction
  • Unemployment scarring
  • Involuntary unemployment