International Differences in Labor Market Status and Transitions During the Pre-

Retirement Years

James Banks

Arie Kapteyn

Jim Smith

Arthur van Soest

MRRC 8/10/06

Motivation and background

• Aging societies face strong budgetary pressures, but these are much more severe in some countries than in others.

• The effect of financial incentives is well-documented; we want to stress the effect of disability.

• Prevalence is only part of the story; we also want to consider dynamics.

• Institutions matter. How much?

MRRC 8/10/06

Preliminary conclusion:

Too much dynamics may be bad for your employment

MRRC 8/10/06

Data• ECHP: annual longitudinal survey of households in the EU. Data

collected by national agencies under the supervision and coordination of Eurostat.

• Started in 1994 and ended in 2001. The first wave covered some 60,500 households and some 130,000 adults aged 16 and above from all countries except Austria, Finland and Sweden. Austria and Finland were added in the second and third waves.

• As of the fourth (1997) wave, the original ECHP survey was terminated in Germany, Luxembourg, and the UK; comparable data for these countries were obtained from existing national panels.

• PSID

MRRC 8/10/06

Data (2)

MRRC 8/10/06

Variable Definitions

• Disability (PH003A): Are you hampered in your daily activities by any physical or mental health problem, illness or disability? Three point scale (2-point in UK and US)

• Labor force status (PE001A):– Working

• 1 working with an employer in paid employment• 2 working with an employer in paid apprenticeship• 3 working with an employer in training schemes • 4 self-employment• 5 unpaid work in a family enterprise

MRRC 8/10/06

Variable Definitions (2)

• Health (PH001): How is your health in general?– 1 Very good– 2 Good– 3 Fair– 4 Bad– 5 Very bad

• In PSID, the scale is– 1 Excellent– 2 Very Good– 3 Good– 4 Fair– 5 Poor

MRRC 8/10/06

Self-reported Health and Disability (men)

50-64 50-64Denmark 23.4 6.2Netherlands 28.6 5.6Belgium 17.4 5.1France 25 8.2Ireland 21.8 3.0Italy 11.9 10.4Greece 17.6 7.0Spain 19.6 11.1Portugal 26.7 21.6Austria 24.6 7.8Finland 35.4 7.8Sweden 24.2 3.0Germany 49.7 24.3UK 15.2 9.2US 18.3 13.5 (Fair/Poor)

Percent with Disability Percent bad and very bad health

MRRC 8/10/06

Labor Market Status by Disability (men)

50-64 workingDenmark 23.4 50.0Netherlands 28.6 43.1Belgium 17.4 40.9France 25 43.1Ireland 21.8 38.3Italy 11.9 32.6Greece 17.6 42.6Spain 19.6 25.1Portugal 26.7 43.4Austria 24.6 35.8Finland 35.4 46.9Sweden 24.2 50.0Germany 49.7 48.4UK 15.2 25.8US 18.3 45.4

Percent with Disability Disabled, 50-64

MRRC 8/10/06

There is clearly a large variation in self reported disabilityand in the employment rate of those who report to have a work limiting health condition.

Where does this variation come from and how can weexplain the variation as a result of different dynamicprocesses?

MRRC 8/10/06

We estimate dynamic models for 14 countries

• One equation explains current disability based on health, demographics, past disability and past work

• The second equation explains whether one works or not based on health, demographics, current and past disability, and past work.

• I will not present model estimates, but just some simulations

MRRC 8/10/06

Disability Dynamics, France.

Not Mildly Severely PrevalenceNot 0.92 0.06 0.02 0.83Mildly 0.45 0.39 0.16 0.1Severely 0.17 0.24 0.59 0.07Equilibrium 0.81 0.11 0.08 .

.Not 0.87 0.1 0.03 0.8Mildly 0.57 0.24 0.19 0.12Severely 0.32 0.25 0.43 0.08Equilibrium 0.79 0.13 0.09 .

.Not 0.89 0.09 0.03 0.84Mildly 0.66 0.19 0.14 0.1Severely 0.38 0.26 0.36 0.06Equilibrium 0.83 0.11 0.06 .

Actual

Predicted

Predicted, US

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Work Dynamics, FranceC o u n t r y Prevalence

Doesn't work WorksD o e s n ' t w o r k 0.89 0.11 0.29W o r k s 0.06 0.94 0.71E q u i l i b r i u m 0.34 0.66 .

.D o e s n ' t w o r k 0.82 0.18 0.25W o r k s 0.06 0.94 0.75E q u i l i b r i u m 0.26 0.74 .

.D o e s n ' t w o r k 0.8 0.2 0.4W o r k s 0.17 0.83 0.6E q u i l i b r i u m 0.46 0.54 .

Actual

Predicted

Predicted, US

MRRC 8/10/06

Work and Disability Dynamics, France0

51

01

52

0P

erce

nt D

isa

bilit

y M

ild,

Fra

nce

1994 1996 1998 2000 2002Year

Mild Dis Predicted Mild Dis

Predicted Mild Dis, US coeff

Mild disability, actual and predicted

05

10

15

20

Pe

rce

nt D

isab

ility

Se

vere

1994 1996 1998 2000 2002Year

Severe Dis Predicted Severe Dis

Predicted Severe Dis, US coeff

Severe d isab ility, actua l and predicted France

02

04

06

08

0P

erce

nt W

ork

ing

1994 1996 1998 2000 2002Year

Work Predicted Work

Predicted Work, US coeff

Percent working, actual and predicted France

Simulated disability and work France

MRRC 8/10/06

Work and Disability Dynamics, Germany

01

02

03

0P

erce

nt D

isa

bilit

y M

ild,

Ge

rman

y

1994 1996 1998 2000 2002Year

Mild Dis Predicted Mild Dis

Predicted Mild Dis, US coeff

Mild disability, actual and predicted

05

10

15

20

Pe

rce

nt D

isab

ility

Se

vere

1994 1996 1998 2000 2002Year

Severe Dis Predicted Severe Dis

Predicted Severe Dis, US coeff

Severe d isab ility, actua l and predicted Germany

02

04

06

08

0P

erce

nt W

ork

ing

1994 1996 1998 2000 2002Year

Work Predicted Work

Predicted Work, US coeff

Percent working, actual and predicted Germany

Simulated disability and work Germany

MRRC 8/10/06

Work and Disability Dynamics, UK0

51

01

52

0P

erce

nt D

isa

bilit

y M

ild,

Un

ited

Kin

gdo

m

1994 1996 1998 2000 2002Year

Mild Dis Predicted Mild Dis

Predicted Mild Dis, US coeff

Mild disability, actual and predicted

05

10

15

20

Pe

rce

nt D

isab

ility

Se

vere

1994 1996 1998 2000 2002Year

Severe Dis Predicted Severe Dis

Predicted Severe Dis, US coeff

Severe d isab ility, actua l and predicted United Kingdom

02

04

06

08

0P

erce

nt W

ork

ing

1994 1996 1998 2000 2002Year

Work Predicted Work

Predicted Work, US coeff

Percent working, actual and predicted Uni ted Kingdom

Simulated disability and work United Kingdom

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Work and Disability Dynamics, Austria0

51

01

52

0P

erce

nt D

isa

bilit

y M

ild,

Au

stri

a

1994 1996 1998 2000 2002Year

Mild Dis Predicted Mild Dis

Predicted Mild Dis, US coeff

Mild disability, actual and predicted

05

10

15

20

Pe

rce

nt D

isab

ility

Se

vere

1994 1996 1998 2000 2002Year

Severe Dis Predicted Severe Dis

Predicted Severe Dis, US coeff

Severe d isab ility, actua l and predicted Austria

02

04

06

08

0P

erce

nt W

ork

ing

1994 1996 1998 2000 2002Year

Work Predicted Work

Predicted Work, US coeff

Percent working, actual and predicted Austria

Simulated disability and work Austria

MRRC 8/10/06

So?

• Using US coefficients rarely raises disability, and often lowers it.

• However, this does not lead to higher employment rates when using US coefficients. In a number of countries it would imply substantially lower employment rates.

• Why is that? For work, we always see more turnover when we apply US coefficients to the EU countries. But the inflow into work goes up less than the outflow out of work.

• So on net, it tends to lower employment.

MRRC 8/10/06

How about within Europe?

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How countries rank on transition from work to non-work

• Germany, Spain (.09)

• Ireland, Finland Greece, UK (.07)

• Austria, Denmark, France, Italy, Netherlands, Portugal (.06)

• Belgium (.05)

So: little variation

MRRC 8/10/06

How countries rank on transition from non-work to work

• UK (.22)• Denmark (.21)• Finland (.20)• Portugal (.15)• Germany, Spain (.14)• Netherlands (.13)• Ireland (.12)• Austria, France, Greece (.11)• Italy (.09)• Belgium (.07)

• A lot more variation

MRRC 8/10/06

So the variation across European countriesis mainly a result of how successful they arein inducing inflow into work.

MRRC 8/10/06

Concluding Remarks

• Self-reported disabilities vary considerably across countries, and so do employment rates.

• There is little variation in flows out of work; but a lot in flows into work.

• When we impose U.S. dynamics on European countries, we see more turnover, particularly out of work.

• In some countries this would reduce the percentage of individuals working.