Pensions and Productivity

International Labour Review, January 1, 2000 | Go to article overview

Pensions and Productivity


Dorsey, Stuart; Cornwell, Christopher; Macpherson, David. Pensions and productivity. Kalamazoo, MI, W. E. Upjohn Institute for Employment Research, 1998. viii + 139 pp. Tables, figures, bibliography, indices. ISBN 0-88099-185-2.

Most studies of private pensions have focused on the advantages of saving for retirement through a pension. But this one takes a different angle: the internal labour market perspective, which suggests that in addition to providing a vehicle for retirement saving, defined-benefit pension schemes establish incentives that promote productivity. It is set against the economic and institutional background of the United States where private pensions provide a large and growing share of income for retirees.

While defined-contribution schemes are more or less neutral towards quit or retirement decisions, defined-benefit schemes - still the dominant form of coverage in the United States - typically reward long tenure and penalize late retirement. "The popularity of defined-benefit coverage well over half the workers with pensions are still covered by these plans - argues that pension incentives have important economic functions. Because private pensions are voluntary, and given the availability of defined-contribution plans that offer a simpler, low-cost retirement savings vehicle, defined-benefit plans must convey distinct advantages. The internal labor market perspective suggests that one of the advantages is incentives for higher productivity."

A general introductory chapter on pensions and the labour market examines demand-side and supply-side factors and highlights the significance of the productivity theory of pensions. Another provides an overview of private pensions and pension policy in the United States. In the next two chapters, the authors turn to pension incentives and internal labourmarkets. Here, their general argument that defined-benefit career incentives might be grounded in productivity gains is tested against the firmspecific training model, the principal-agent (or shirking) model, and the asymmetric information hiring model. Pension tenure incentives for long tenure are found to be consistent with the firm-specific training model, when skills accumulate gradually; and defined-benefit pensions also have advantages in creating deferred compensation in the principal-agent model.

This theoretical investigation is followed by a chapter that reviews empirical evidence on pensions and productivity.

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