Budapest Working Papers on the Labour Market BWP - 2012/3
We provide new empirical evidence on the link between age and productivity using a transitional context. Building on a model of skill obsolescence, we assess the long-term adjustment process following a sudden change in skills needed in production that severely worsened older workers' labor market situation. The model implies that (a) the devaluation of skills should affect highly educated older workers more severely (b) the disadvantage should disappear over time as newer cohorts acquire more suitable human capital, and (c) the timing should differ among firm ownership types, reflecting the inflow of modern technologies and practices. Rather than focusing on wage differentials, we estimate the firm-level productive contribution of older relative to younger workers differentiated by education level. To assess long-run trends, we adapt the augmented production function methodology developed in international literature and apply it to a linked employer-employee dataset from Hungary covering from before (1986) to 20 years after (2008) the economic transition. The results suggest that - in line with the model - the within firm productivity differential between older and younger workers following the transition was largest among the highly skilled (-0.13 in 1996-2000). The fall in relative productivity followed the inflow of modern capital: the gap was largest in 1992-1995 in foreign-owned firms (-0.6), while it appeared later in domestic firms (-0.18 in 1996-2000) before disappearing by 2006. The magnitude and the negative effects of the adjustment period witnessed in Hungary highlight the importance of policies aimed at providing core competencies and adult training that enable older workers to adjust to sudden economic and technological changes.