Evaluating Age Discrimination Laws
Neumark, David, NBER Reporter
The Age Discrimination in Employment Act (ADEA) was enacted by Congress in 1968 to "promote employment of older persons based on their ability rather than age; to prohibit arbitrary age discrimination in employment; to help employers and workers find ways of meeting problems arising from the impact of age on employment." Originally, the ADEA protected workers aged 40-65. Later amendments first prohibited mandatory retirement before the age of 70, and then outlawed it altogether. In recent years, age discrimination has come to represent a significant proportion of the complaints filed with the Equal Employment Opportunity Commission. For example in 1990, just over 10,000 complaints of age discrimination were filed under the ADEA, compared with around 43,000 complaints filed under Title VII of the Civil Rights Act for alleged discrimination based on race or sex.
Arguments For and Against Age Discrimination Laws
The fact that workers file age discrimination complaints under the ADEA does not, in and of itself, indicate that discrimination against older workers exists and should be addressed in the same manner as race and sex discrimination. There are two reasons to be cautious regarding this interpretation. First, there is an absence of prima facie evidence of discrimination against older workers. If anything, older workers tend to fare better than younger workers. One of the most robust empirical facts in labor economics is the "age-earnings profile," which captures the increases in earnings that workers experience over most of their career. In addition, older workers tend to have higher non-labor income and lower unemployment rates than younger workers. This contrasts with evidence regarding race and sex differences in labor markets; while economists and others continue to debate the source of these differences, there is no question that the earnings of women and minorities are lower.
Second, an influential model of the age-earnings profile seriously calls into question the virtue of age discrimination legislation, especially the prohibition of mandatory retirement. In this model (developed by Edward P. Lazear) employers, in order to elicit effort from workers, initially pay workers less than the value of their productivity in exchange for promises of future wages that will exceed the value of their productivity. Mandatory retirement ages are then necessary to induce high-wage workers to leave the firm eventually. In Lazear's model, these contracts are efficient from society's perspective, and workers find them desirable even though they include mandatory retirement. However, once workers reach the mandatory retirement age, they would prefer to continue working at their current wage, and the ADEA gives them the right to do so. This led Lazear to conclude that the ADEA's ban on mandatory retirement would generate efficiency losses.(1)
Thus, the wisdom of legislation that prohibits age discrimination rests on a few key questions. First, is there firmer evidence of discrimination against older workers, particularly in the period predating the ADEA and the growth in age discrimination complaints? Second, does Lazear's model provide the best explanation of the employment relationship, and of age-earnings profiles in particular? If it does, then legislation prohibiting age discrimination, including mandatory retirement, may do more harm than good. Alternatively, if other models better explain the age-earnings profile, such as the general human capital model in which the age-earnings profile reflects increases in productivity, then such legislation is less likely to have detrimental effects. Finally, even if Lazear's model does provide the best explanation of the age-earnings profile, might age discrimination legislation actually strengthen such contracts, rather than weakening them? Much of my research over the past four years has addressed these questions.
Was There Age Discrimination?
It is difficult to draw inferences regarding the existence of discrimination even for demographic groups that are relatively low paid, let alone for older workers who are not low paid on average. …