TRANSITIONS OUT OF AND BACK TO EMPLOYMENT AMONG OLDER MEN AND WOMEN IN THE UK

This paper analyses the labour market transitions of older men and women using data from the British Household Panel Survey (BHPS). I find large peaks in exit rates out of employment at ages 60 (women) and 65 (both sexes) which occur in the exact birthday month. This suggests that pension schemes have strong incentive effects. Discrete-time hazard regression analysis shows that benefits and health status are the two most important determinants of retirement, with effects that are larger than found in previous studies for British and US men. When modelling unobserved heterogeneity I find that the share of ‘movers’ between work and non-work is twice as high among women as among men. NON-TECHNICAL SUMMARY In the United Kingdom, as in most industrialised countries, life expectancy has risen substantially while the number of workers per pensioner and work income as a share of older people’s total income have fallen considerably. These developments manifest themselves on the level of the individual pensioner in the form of inadequate retirement income and healthcare entitlements and have led to a great interest in the understanding of older people’s labour market participation and, in particular, their retirement behaviour. When does somebody retire and why? Which retirees might return to work and why? How are these transitions affected by how much one could earn in the labour market and by how much income one could have without working? I address these questions, analysing the labour market transitions of older men and women using data from the British Household Panel Survey (BHPS) for 1990-2004. The individuals considered are aged 40 to 70 years. First, I look at the risk for a worker of exiting employment within the next twelve months and at the risk for a non-worker of resuming employment within the next twelve months, considering differences in risks by sex as well as by other characteristics. I find that the probability of employed men to exit employment within the next year is highest at age 65, and that of employed women at age 60, i.e., in both cases at state pension age. In fact, these peaks mostly occur in the exact birthday month: a man who is employed directly before his 65th birthday has a 45.38% risk of stopping to work within one month. When looking at a woman, the exit risks are 11.78% in the month of her 60th and 19.49% in the month of her 65th birthday. This suggests that pension schemes have strong incentive effects. The return to work probability for men is approximately twice as high as that for women until about age 57 when returns become rare for both sexes. I also find that men and women who have ever contributed to, or received money from, an occupational pension scheme are much more likely to return to work than those who have not. When I considered differences in these risks among men and women using multivariate regression models, there were several clear findings which are to be interpreted ‘other things being equal’. First, there are no significant differences between single people and those with a partner in the probability of exiting or re-entering employment. Second, people who gained a lot of employment experience prior to their 40th birthday have a lower risk of exiting employment and higher chances of re-entering employment between ages 40 and 70, but the effects for women are not that large. Third, women generally make fewer exits or returns if regional unemployment is high. Fourth, people in poor or very poor health have a much higher risk of exiting employment and a much lower risk of returning to work, with effects that are larger than found in previous studies on UK and US men. Fifth, for women, occupational pension membership is associated with a higher labour market participation while for men the effects are opposite or not significant. Sixth, women who have ever had a child have a lower risk of exiting employment, which is contrary to what one may have expected. Seventh, as in earlier literature, earning capacity does not seem to be an important determinant of labour market exit or entry, but the benefit entitlement has important effects on the return probability: the higher the benefit entitlement, the lower the probability to return to the labour market. These effects are again larger than found in earlier studies. Summing up, health status and benefit entitlement are the two most important determinants of retirement. Finally, I also find that among women the share of ‘movers’, i.e., of individuals with a higher risk of making transitions out of and back to employment given the same values of the observed explanatory variables, is twice as high as among men.