Today the Office for National Statistics released its monthly report on employment in the UK. Employment was essentially unchanged at 29.7 million in January 2013, higher than the pre-recession peak of 29.6 million in April 2008. Previous IFS research has attributed this strong employment performance in part to increased labour supply as a response to wealth losses during the financial crisis and changes to pensions and benefits implemented since the last recession, which encourage individuals to be in work.

The remarkably rosy picture for total employment belies contrasting trends between different groups. The employment rate amongst 25–29 year olds was 77.5% in the last quarter of 2012, the most recent period for which data on employment rates disaggregated by age are available. This is well below the peak of 80.4% seen in 2008. On the other hand, employment rates for older people have continued to increase over this same period. Indeed, the employment rate of 60–64 year old women has grown at the same rate since early 2010 as it did during the decade up to 2010. The proportion of 60–64 year old women in work rose from 25.6% in 2000 to 34.1% in 2010 while from 2010 to late 2012 it rose by a further 2.2 percentage points (to 36.3%) in just under three years.

What explains such contrasting experience between the young and the old? There are long term trends which have seen employment rates for older women rising for many years. But since 2010 increases in the state pension age for women have played a central role. Our estimates suggest that this has been responsible for the greater part of increased employment among 60–64 year old women since 2010.

Since April 2010, the state pension age for women has increased from 60 to 61½, and it is legislated to reach parity with that for men (at age 65) in 2018. In recently published IFS research we estimate that the increase in the state pension age for women from 60 to 61 that occurred between April 2010 and April 2012 increased employment of 60 year old women by 7.3 percentage points.

Using this estimate, we can calculate how employment rates would have evolved if the female state pension age were still 60. These new results, presented in the Figure below, show that – in the absence of the increase in the state pension age – employment rates of women aged 60 to 64 would have risen by only an estimated 0.3 percentage points between 2010 and 2012 (to 34.4%), instead of the large growth to 36.3% that was actually seen. In other words, the increase in the female state pension age explains an estimated 85% of the growth in the employment rate of this group that has occurred since early 2010.

Figure: Employment rates for 60–64 year old women since the crisis began with and without state pension age increase

Source: Authors’ calculations using Labour Force Survey.

Our research also finds that the increase in the female state pension age has increased employment rates of affected women’s husbands – albeit to a lesser extent than the women’s own employment rates – explaining some of the resilience in employment rates of older men that has also been observed since 2010.

Is it possible that the increase in employment rates for older workers is a cause of the lower employment rates for younger people? In the short term, especially if demand for workers is weak, it is possible that firms might substitute towards keeping on older workers rather than hiring younger workers. However, having more older individuals in work will also boost overall demand in the UK economy and therefore increase demand for workers of all types. Previous IFS research finds no evidence that encouraging early retirement for older workers led to an increase in the employment rates of younger people. In the longer run, therefore, it seems particularly unlikely that higher rates of employment for older people would lead to lower employment rates of younger people.

In summary the vast majority of the increases in employment rates among older women seen since 2010 can be explained by the increase in the state pension age for women, which began to rise from 60 in April 2010. This has already led to the majority of 60 year old women being in paid work for the first time ever. As the state pension rises further throughout this decade, this trend of increasingly long working lives for women is likely to continue.

This observation is part of a project funded by the Nuffield Foundation.