Why was there mandatory retirement?

Papers that changed how I see things: a series

Edward Lazear’s “Why is there mandatory retirement?” is in the Journal of Political Economy, December 1979. In grad school economics implicit contracts were a hot topic at the time, so we all read this. It gets a bit mathy, though not overwhelmingly so - here is a hand-waving version:

Workers like job stability, and will be attracted to firms that promise stability. Employers like to avoid labor turnover: it is costly to always be searching for new employees to replace ones who just quit, and you never get to build up a good store of tacit inside-the-firm knowledge. But we can’t have formal forty-year labor contracts as a solution - there are too many uncertainties that accumulate over such a period.

But we can have implicit contracts, an unwritten understanding, a handshake. In Lazear’s model, the handshake looks like this: employers say “our pay is not the greatest when you start out. But, stick with us, and your pay will rise over time, whether you are in the same position or through promotion (and we like to promote from inside). In fact, in your later years with the firm you will be paid very well, even if your productivity has not risen at the same rate as your salary during your tenure here.”

This requires a lot of trust, and so young, potential employees will want to hear from older employees that, yes, the firm is good on its word, they are happy to still be there. The firm, therefore, cannot just go around breaking this promise whenever it suits it to do so.

Anecdata: my father, and my sister, each spent their entire working careers with one single firm, a financial institution in Canada. The firm offered an implicit contract much like this. When I was an undergraduate, and working for the same firm during summers, my father even told me this as an incentive to consider them for after I graduated.

But here is the catch. The implicit contract relies on mandatory retirement. In old age, many older employees will have big incentives to stay as long as they can: the pay is great, and not a lot is asked of them. When the employee first signed on, the long term package looked good, even with mandatory retirement. But when retirement day arrives, they wish it could be extended. And so it has to be understood from the beginning that at some pre-determined age, it is time for the employee to retire.

My first full-time college teaching job was in Canada in 1982, and there was mandatory retirement at age 65. There isn’t any more. So what did professors start to do when they hit age 65? Not retire. And so we get an older professoriate. Francis Woolley documented the effects here and here, noting that anyone who tried to claim mandatory retirement was biased against women was simply being daft. Who are predominantly the old hangers-on? How does that gender profile compare to recently graduated job-seekers?

Well, a deal is a deal, even across universities (for these purposes I treat academia as a single institution) and international borders. I hold my final exams today, and by that I mean I hold my final exams today. I just turned 65, “t = T” in Lazear’s formal model, and it is time for me to put the chalk away. For me: this is not an exhortation for all faculty my age to do the same. I started at this career relatively early, and from the beginning had a vague plan for this eventual day. Everybody has a different situation in terms of how long they have worked, and their circumstances at home and in their work. There are faculty older than me who contribute a tremendous amount to their students and to scholarship. But it is my time.

My colleagues, faculty, students and staff at Indiana have been fantastic, this is no reflection on them at all. I remain living but a few blocks from campus, and have let anyone who wants know that I have dozens of lectures in my back pocket I can give on thirty minutes notice should someone have the flu. And I am enjoying this online forum. I will follow Keynes’s advice to his grandchildren.

It is time to create space for another scholar, a younger one. Office 410 gets very nice afternoon light, I hope they enjoy it.