Social security, economic development and the labor force participation of the elderly in Latin America

Social security

Latin America is one example of an important context for elaborating linkages between economic development, pension benefits provision and labor force participation of the elderly. The rapidly aging population presents one of the greatest public policy challenges in Latin America, and raises concerns about living conditions, social support and health care provision for the elderly, especially where economic development has weakened family support and a universal welfare system is not yet in place. Latin America is also interesting because it combines countries with more developed and less developed public pension programs. Also, it is normally argued that the pressure of youth unemployment might be reduced by creating incentives for the elderly to leave the labor force (Gruber and Wise, 2010). Thus, the region provides a series of examples and large variation in socioeconomic scenarios to study this problem. With a recent paper, I contribute to the debate by investigating labor force participation, especially for older males, in Latin America. I use household survey data from twenty-three (23) Latin American and the Caribbean countries, from around 2005, to perform a cross-country analysis on labor force participation focusing on differences by pension coverage, rural and urban, and formal and informal labor market relation. I also use the data to show different patterns by income level and stage of the demographic transition to describe historical trends in labor force participation rates of older workers.

The study of retirement behavior and trends uses labor force participation rates as its basic measure (Costa, 1998; Hurd and Rohwedder, 2011). The idea is to follow the same approach in this paper. Labor force participation rate is defined by the International Labor Organization (ILO) as the proportion of the population of some specific age either working or actively seeking work to the total population in the same age group. The labor force participation rate is a very useful measure to study the evolution of labor force participation over time and cross-countries. The main advantage of using the labor force participation rate, compared to other measures such as hours of work, work tenure, etc, is that it is available in all countries over a long period of time. We also consider the estimates of labor by region of residence (rural and urban), educational groups, and for older persons by coverage of pension programs.

Based on the labor force participation rates it is possible to estimate one important summary and comparative measure: unused labor capacity (Gruber & Wise, 1999). The Unused Labor Capacity is a summary measure of the labor force participation of older workers. The measure is calculated by summing up the proportions of individuals out of the labor force between ages 50 and 69 and dividing it by 19. The measure is interpreted as follows. Suppose the unused capacity measure between ages 50 and 69 in a particular year is 50%. It means that a cohort experiencing the labor force participation rates in that year for their whole life would work only 50% of their potential life time person-working-years (Gruber & Wise, 1999).

In Latin America, as in other regions of the world, population with older age structures have lower labor force participation rates for older persons (Figure 1). Clark et al (1999) and Profeta (2002) argued that older populations have already created a universal system of old-age security and are, in general, more developed and wealthier. The combination of these elements leads to early retirement and lower labor force participation at older ages. The relation between these variables is less known in Latin America (Carvalho-Filho, 2008; Queiroz, 2008).

Figure 1
Older Persons Labor Force Participation Rates and Percentage of Population Aged 65 and above, Latin America, 2005
Older persons labor force participation

Unused Productive Capacity for twenty-three Latin American countries around 2005 for the 50-65 age group ranges from 15% in Guatemala to 40% in Uruguay. This means that in Uruguay, individuals aged 50-65 are working only 60% of their potential working life. We also observed a wide variation; the mean is about 30% with standard deviation of 10. The trend in unused productive capacity seems to be related to economic development, population aging and size of the pension system in these countries.

Unused Capacity is positive related to population aging, economic development and coverage of the pension system. The relation between unused capacity and GDP per capita, a measure of economic development, is shown in Figure 2. First, we find a positive relation between the two variables: as income increases, unused capacity also increases. A similar finding was observed by other authors studying more developed countries thought the world. The results indicate that in countries with low income per capita, most individuals remain in the labor force until very old ages (or they are able to work). As the economy develops there is a change in the composition of employment and emergence of old-age assistance programs, and individuals start to leave the labor force at younger ages. The level of economic development is also associated with demographic transition, and an older population age structure.

Figure 2
Unused Labor Capacity (males) and GDP per Capita, Latin America, 2005

Unused Labor Capacity

In this paper, I show that in Latin American countries with low per capita income, most men remain in the labor force until very old ages. As GDP per capita increases, meaning economic development, and related changes such as greater urbanization, reduction in the share of the population in the informal sector, population ages, and public pension programs become more mature and the labor force participation of elderly men, even those aged 55-59, start to decline. The rapid process of population aging will have huge impacts on the public old-age support system for the elderly in Latin America. The increase in old age dependency ratio means that a larger number of potential beneficiaries will depend on a smaller number of workers. The results also indicate that as economies developed and pension systems become universal and more generous the labor force participation at older ages tend to decline more rapidly. The importance of old-age support systems throughout the world is unquestionable, and the well-being of the elderly depends heavily on the provision of income from such programs. However, the necessity to adjust such programs to population aging is clear and fundamental.

One of the main questions in this discussion is how the reform, and in some cases the implementation of the programs, should take place and which generations will afford for the burden of the reform. In summary, the analysis on the determinants of male labor force participation rates at older ages in Latin America shows that economic development, population aging and variables related to the structure of the old-age pension system have important impact on determining the observed variation.

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