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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.
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Does offering higher teacher salaries improve pupil attainment?
In new work published today, IFS researchers analyse the impact of offering higher teacher salaries on pupil attainment. We examine salary scales and pupil attainment in primary schools in and around London. For these schools, and for the salary differences of just under 5% that we observe, we do not find evidence that higher salary scales for teachers have much impact on pupil attainment. This suggests that if individual schools offered salary differentials on this scale across-the-board, they would not necessarily attract more effective teachers.
The next five years look better but tough fiscal choices remain for Scotland
The latest public finance forecasts published by the Office for Budget Responsibility (OBR) in December presented a better outlook for the UK than had been suggested by their March forecast. This is good news for the UK and Scotland in the short-term but much of the improved short-term outlook comes at the expense of reduced scope for economic recovery after 2018–19. Also the one area of greater weakness in the OBR’s latest forecast – revenues from oil and gas production – has substantially more adverse consequences for Scotland’s fiscal position than for the UK as a whole. In short, the new forecasts do little to diminish the tough choices that will face Scotland (and, to a lesser extent, the UK) if it is to achieve long-run fiscal sustainability.
50p tax – strolling across the summit of the Laffer curve?
Ed Balls and Ed Milliband have cited recent HMRC statistics which show those paying the 50% income tax rate are estimated to have paid some £10 billion more in tax over the three years 2010-11 to 2012-13 than was projected to be the case back in 2012 when HMRC analysed how much the tax was raising. Is that an indication that the 50p rate was more successful in raising revenue than HMRC concluded in their analysis?