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Age and Individual Productivity: A Literature Survey

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Max-Planck-Institut für demografische Forschung Max Planck Institute for Demographic Research Konrad-Zuse-Strasse 1 D Rostock GERMANY Tel +49 (0) ; Fax +49 (0) ;
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Max-Planck-Institut für demografische Forschung Max Planck Institute for Demographic Research Konrad-Zuse-Strasse 1 D Rostock GERMANY Tel +49 (0) ; Fax +49 (0) ; MPIDR WORKING PAPER WP AUGUST 2003 Age and Individual Productivity: A Literature Survey Vegard Skirbekk This working paper has been approved for release by: Alexia Fürnkranz-Prskawetz Head of the Research Group on Population, Economy, and Environment. Copyright is held by the authors. Working papers of the Max Planck Institute for Demographic Research receive only limited review. Views or opinions expressed in working papers are attributable to the authors and do not necessarily reflect those of the Institute. Age and Individual Productivity: A Literature Survey VEGARD SKIRBEKK 1 1 Skirbekk is Research Scholar at the International Institute for Applied Systems Analysis (IIASA), Schlossplatz 1, 2361 Laxenburg, Austria. The support of the International Institute for Applied Systems Analysis (IIASA), the Max Planck Institute for Demographic Research and the Norwegian Research Council is gratefully acknowledged. The author values the help of David Horlacher, Landis MacKellar, Heiner Maier, Alexia Prskawetz as well as comments from Wenke Apt, Sara Grainger, Karsten Hank, Torbjørn Hægeland, Puja Jawahar, James Raymer, Dorothea Rieck, Pertti Saariluoma and Ingrid Teply. 1 Abstract This article surveys supervisors ratings, work-sample tests, analyzes of employeremployee datasets and other approaches used to estimate how individual productivity varies by age. The causes of productivity variations over the life cycle are addressed with an emphasis on how cognitive abilities affect labor market performance. Individual job performance is found to decrease from around 50 years of age, which contrasts almost life-long increases in wages. Productivity reductions at older ages are particularly strong for work tasks where problem solving, learning and speed are needed, while in jobs where experience and verbal abilities are important, older individuals maintain a relatively high productivity level. 2 1. Introduction Understanding age-productivity profiles is of vital importance in several areas of economic research. Given that older individuals are less productive, an aging working population can lower economic growth and decrease fiscal sustainability. If senior workers wages exceed their productivity levels, their wages may have to be reduced to increase their employability. Thus, the removal of seniority-wage systems may be a condition that is required to allow the political attempts to increase the retirement age to be successful. The current article focuses on how individual productivity varies by age, as well as the causal factors of these productivity differentials. Figure 1 outlines how physical abilities, mental abilities, education and job experience form an individual s productivity potential. Combined with the firm s characteristics, these factors determines job performance. The weight of the different causal factors in determining individual productivity is steadily changing, where mental abilities and education have long been growing in importance, while physical abilities have become less important. Continuously changing types of work can imply that that the ability to absorb new information is becoming increasingly important relative to having long experience. This paper is organized as follows: Research on age-variation in mental abilities is presented in section 2, the role of experience and learning is discussed in section 3, while section 4 debates how mental abilities relate to productivity. Section 5 reviews the evidence on productivity variation between the age groups, section 6 presents data on age-earnings profiles, followed by section 7, which discusses the problems of wage-productivity differentials at higher ages, and section 8 concludes. 3 2. Age, Cognitive Abilities and Interrelations with Training A large body of evidence supports the notion that cognitive abilities 2 decline from some stage in adulthood. Verhaegen and Salthouse (1997) present a metaanalysis of 91 studies, which investigate how mental abilities develop over the life span. On the basis of these studies, they conclude that the cognitive abilities reasoning, speed and episodic memory declines significantly before 50 years of age and more thereafter. The ability levels of employed white men and women up to the age of 65, using data from the General Aptitude Test Battery collected in the U.S. from , is shown in Figure 2. These findings suggest a relatively sharp decline in most abilities, after maximum values are reached in the 20s and early 30s (Avolio and Waldman 1994). The decline of mental abilities from early adulthood is a universal phenomenon. The age-induced changes in cognitive abilities are similar across countries and within population subgroups, such as between men and women (Park et al. 1999, Maitland et al. 2000). Further individuals with high and low ability levels are subject to the same age-induced changes in cognitive functioning (Deary et al. 2000). Even among non-human species, ranging from fruit flies to primates, age-reductions in memory and learning capabilities have been observed (Minois and Bourg 1997, Bunk 2000). 4 In spite of the seemingly unavoidable reductions in cognitive abilities, targeted training programs seem effective in softening, or halting age-related decline. Schaie and Willis (1986a, 1986b) conclude that such programs can stabilize or even reverse age-specific declines in inductive reasoning and spatial orientation among many individuals. Ball et al. (2002) find that exercising speed, reasoning and memory abilities enhance the functional level of those who undergo training relative to those who do not. The different cognitive abilities tend to follow relatively independent slopes over the life cycle (Schaie 1994). A division can be drawn between the fluid abilities, mental abilities that are strongly reduced at older ages and crystallized abilities, which remain at a high functional level until a late age in life (Horn and Cattell 1966, 1967). Fluid abilities concern the performance and speed of solving tasks related to new material, and they include perceptual speed and reasoning. The second group, crystallized abilities, measures abilities that improve with accumulated knowledge, such as verbal meaning and word fluency. The distinction between fluid and crystallized abilities is supported by empirical findings, such as Schwartzman et al. (1987), who studies psychometric test results of young and older men. They find that verbal abilities remains virtually unchanged, while reasoning and speed abilities decline with age. Blum et al. (1970) provide similar findings, in a test-retest study of twins, where vocabulary size is 2 Cognitive or mental abilities refer to broad aspects of intellectual functioning. These include reasoning, spatial orientation, numerical capabilities, verbal abilities and problem solving. The most commonly used measurement of cognitive abilities is the IQ score. 5 observed not to differ at older and younger ages, despite a general reduction in other cognitive abilities. Further, the relative demand for work tasks that involve certain cognitive abilities have shifted asymmetrically over recent decades. The demand for interactive skills, which are abilities that are relatively stable over the life cycle, has increased more than the demand for mathematical aptitude, which declines substantially by age (Autor et al. 2003). This could suggest that older workers are getting relatively more productive over time. However, any decreases in the labour market value of long experience, is likely to have an even stronger importance on the relative performance of older and younger workers. Studies on age and mental functioning are either based on cross-sectional data, which describe the population s current abilities, or longitudinal data sets, which follow the ability levels of one or more cohorts. Cross-sectional analyzes typically find a younger ability peak, as shown in the Seattle Longitudinal Study where agedifferences are examined both by longitudinal and cross sectional approaches (Schaie 1996). The longitudinal data suggest that for example verbal abilities peak as late as age 53, while according to the cross-sectional data, the ability peaks take place at younger ages. Longitudinal studies tend to suffer from non-random attrition. In the Seattle Longitudinal Study, more than half of the initial sample was lost by the time of the third wave (Schaie 1994). This loss of respondents is likely to create an upward bias in the age-ability estimates, since the remaining sample is likely to be positively selected. A second source of error stems from test practice, meaning that individuals in subsequent waves perform better simply because they have more exercise in taking 6 these type of tests. Thus, ability decrements found in longitudinal data will most likely underestimate the true cognitive declines (Willis and Baltes 1980). Cross-sectional data may also produce biased results, since ability levels can vary between cohorts. Willis and Schaie (1998), analyze primary mental ability test results for 1924, 1945, 1952 and 1959 cohorts, and find increasing test performance in reasoning and verbal memory, but decreasing results in tests of vocabulary and numerical ability. Tuddenham (1948) and Flynn (1987) find increases in military cognitive test results over time, though Rodgers (1999) argue that these findings are at least partly a result of methodological errors. Further, the fact that mental ability levels rise may be due to the educational expansion, as well as that they have become more common in candidate-selection processes (Jenkins 2001). This means that individuals from more recent cohorts will be better prepared and more motivated at taking these tests. 3. Experience and Learning The decreased cognitive abilities of older workers can lead to lower productivity, unless their longer experience and higher levels of job knowledge outweighs the declines in mental abilities. Warr (1994) suggest a categorization of professions according to whether age boosts or reduces performance. Here, jobs are distinguished according to whether reduced cognitive performance and/or long experience affects job performance. Salthouse (1984) gives an example of a profession where experience can alleviate the impact of cognitive reductions. He shows that older typewriters work as effectively as their younger counterparts, despite lower speed, since they use more efficient work strategies. 7 The productivity profile may change over time given structural changes in the labor market. Accelerating technological progress can increase the importance of being able to learn and to adjust to new ways of working, while a long work experience may become less important. This is particularly problematic for older employees, due to age-related declines in the processing speed and in learning capacities (Baltes and Lindenberger 1997, Hoyer and Lincourt 1998). The elderly learn at a slower pace than younger individuals especially if what they learn is qualitatively different from what they already have mastered. Rybash et al. (1986) argue that as people grow older, they undergo an encapsulation of job know-how, implying that the individuals skills are attached to certain work domains, and are increasingly less transferable. In some occupations, the cognitive abilities that remain stable are the ones most closely correlated with job success. Senior employees can remain highly productive within a field that they know well and where long experience is beneficial. An example of an age-robust ability is tacit knowledge, procedural knowledge used to solve everyday problems, which can explain why many older managers perform as good as younger ones (Colonia-Willner 1998). However, when they perform unfamiliar work, they have to rely on the ability to learn and adjust, skills where younger individuals tend to be better endowed. Senior individuals are less able than young individuals to reorient themselves to new task requirements and to solve novel problems (Smith 1996) and age-induced productivity reductions may increase with the complexity of the work task (Myerson et al. 1990). Job experience improves productivity for several years, but there does come a point at which further experience no longer has an effect. Ilmakunnas et al. (1999) assess a broad sample of Finnish manufacturing employees, and find that job duration improves job performance for up to 3.8 years. Ericsson and Lehmann (1996) argue 8 that it takes roughly 10 years to achieve expert competence in games where strategic and analytic competence is important, such as chess. In summary, experience increases individual productivity up to a given duration, and thereafter, cognitive declines can decrease performance on the job. 4. Cognitive Abilities, Productivity and Wages Age-variation in mental abilities are likely to affect productivity levels, because they are one of the most important determinants of success in education and on the job (see for example Barrett and Depinet 1991). Altonji and Blank (1999) show how group differences in wages are reflected in test-scores, after adjusting for schooling, industry, region and experience levels. Currie and Thomas (1999) and Tyler et al. (2000) find close relations between mental abilities at a young age and adult income, holding income and family status constant. Currie and Thomas examine scores from a general mental ability test at the age of 7, while Tyler and colleagues analyze the test results of high school drop-outs in math, writing, reading, science and social studies. Schmidt and Hunter (1998) provide a meta-analysis of how individual characteristics relates to job performance such as education, work experience and general mental abilities. They find that mental ability test scores represent the best predictors of individual job performance. Additional studies showing the importance of intellectual abilities in determining wage levels include Bishop (1991), Grogger and Eide (1993) and Murnane et al. (2000). Boissiere et al. (1985), using evidence from developing countries find that some cognitive abilities seem to be more important to wage premiums than others. 9 The performance on the reasoning ability is found to have little influence on wages, while literacy and numerical abilities has the highest impact. The number of years in school has only a moderate effect on earnings. Dolton and Vignoles (2000) examine the pay off to advanced mathematics in a British study of secondary school mathematics specialists, and find that advanced math competence was positively linked to adult earnings. Murnane et al. (1995) find an increasingly strong correlation between test scores and wages. They study the relationship between mathematics test performance at the end of high school and hourly wages in the U.S. The analysis shows that math scores predicts wage levels in the 1980s better than in the 1970s, and that the relationship between wages and test scores was stronger six years after graduation than two years after graduation. Control variables includes the number of siblings, parental education, race, work experience, and whether the individuals were full-time employed or raised in a single parent household. Other evidence suggesting an increase in the payoff to mental abilities over time include Juhn et al. (1993). They find empirical support for the ability payoff increasing within narrowly defined school and occupational groups. 5. Measuring Productivity of individuals at different ages This section survey the main approaches used to measure job performance differences by age. The approaches assessed are supervisors ratings, piece-rate samples, employer-employee matched data sets and age-earnings data, as employment structure. 10 Studies based on supervisors ratings tend not to find any clear systematic relationship between the employee s age and his/her productivity. A meta-analysis by Waldman and Avolio (1986), based on 18 supervisor assessment samples, found a slight negative impact of age on job performance. Accordingly, they argue that only a small part of the productivity variation could be attributed to age. In 96 studies McEvoy and Cascio (1989) review the impact of the employee's age on supervisors assessment and sales records. Age productivity coefficients were found to range from -.44 to.66. Medoff and Abraham (1980, 1981) examine white-collar employees in large American corporations and find that seniority was either unrelated to or negatively associated with performance evaluations. Remery et al. (2003), analyze a survey of 1007 Dutch business leaders and personnel managers. They find that older individuals are more likely to be perceived as less productive when the share of senior employees is higher, which are the workplaces who should have the highest knowledge on this issue. A general disadvantage with the use of supervisors ratings to rank individuals by age and productivity is that managers may wish to reward older employees for their loyalty and past achievements. This can inflate the evaluations of senior employees, and bias the results (Salthouse and Maurer 1996). In a study of firms undergoing rapid technological change, Dalton and Thompson (1971) investigate performance evaluations from not only supervisors, but also employees, in 6 large firms. The ratings from the engineers and their managers suggested that employees in their 30s put in the most effort and perform the most sophisticated technical work, and that productivity falls as the engineers move into their 40s and beyond. 11 A second approach to measuring the impact of age on job performance is based on work-samples, which generally find lower productivity levels among the oldest employees. Mark (1957) and Kutscher and Walker (1960) provide some evidence that mail sorters and office workers kept productivity quite stable at higher ages, while factory workers productivity fell after the age of 55. A study by the U.S. Department of Labor (1957), based on a broad selection of industries, compares output between individuals of different ages. Job performance increases until the age of 35, before steadily declining thereafter. However, the slope of the decline was not steep: productivity declined by only 14% in the men s footwear industry, and 17% in the household furniture industry. These task-quality/speed tests, although potentially more objective, do not necessarily reflect the true productivity of individuals. The workers analyzed are likely to be selected in terms of age groups and occupations (Kate and Perloff 1992). Further, the time-limit in such samples may give age-biased results. Older employees may not be able to uphold a high work speed longer than the short period studied (Salthouse and Maurer 1996). The productivity of individuals doing creative jobs, such as researchers, authors and artists, is measured by the quantity and sometimes the quality of their output. Stephan and Levin (1988) study the performance of researchers within Physics, Geology, Physiology and Biochemistry. The number of publications and the standard of the journals they appear in, is found to be negatively associated with the researchers age. Similar evidence is found in the field of economics, where Oster and Hamermesh (1998) conclude that older economists publish less than younger ones in leading journals, and that the rate of decline is the same for top researchers as among 12 others. Further evidence on that older researchers have decreased research output is found in Bayer (1977) and Bratsberg et al. (2003). Miller (1999) describe how the output of artists vary across their life span. Miller analyzes the number of paintings, albums and books produced by 739 painters, 719 musicians and 22
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