Labor Market Exit of Older Low-Skilled Workers: German Firms' Practices

Recent pension reforms in EU countries display two main trends: 1) early retirement pathways are closed and standard retirement age is increased; 2) the contribution-benefit link is strengthened, mainly by calculating pensions on the basis of lifetime earnings. Both developments endanger the adequacy of old-age pensions of low-skilled workers in particular because they regularly attain low lifetime earnings, leave the labor market (much) earlier than (highly) qualified workers, and often have to claim pension benefits before reaching standard retirement age. In the paper, Germany is taken as an example of a country that, for long, practiced premature exit of older workers and had developed an “early retirement culture”. The first part describes and analyzes the pension reform trends and the employment situation of elderly low-skilled workers. The second part explores in more detail how firms part company with these workers, at what age, and whether firms’ strategies and workers’ preferences have (already) adapted to shifting institutional frameworks. This part is based on semi-structured (qualitative) interviews with human resource managers of firms (manufacturing/service sector) employing at least 50 workers of whom a disproportionate share are low-skilled. It is found that there are significant differences between the industries (mainly across the manufacturing-service axis) with regard to “normal” exit age, adopting measures that promote employability of low-skilled workers and the interest in retaining workers until standard retirement age (or even beyond). Further findings suggest that firms have indeed modified their behavior towards older low-skilled workers and have become more responsive to their needs, i.e. the quest to stay on in the job longer in order to prevent pension cuts. Those workers who actually made it until standard retirement age are often eager to return to their former employer to increase their public pension by working temporarily or part-time.