Increasing the legal retirement age: The impact on wages, worker flows and firm performance

Many countries with pay-as-you-go pension systems have increased or plan to increase their legal retirement age (LRA) in order to address the financial consequences of ageing.Although the success of these policies is ultimately determined at the labour market, little is known about the demand-side implications of higher LRAs. Here, we identify the effect of LRA’s upon firms by considering a legislative reform introduced in Portugal in1994: women’s LRA was gradually increased from 62 to 65 years while men’s LRA stayed unchanged at 65. Using detailed matched employer-employee panel data and difference-in-differences matching methods, we analyse the effects of the reform in terms of a numberof worker- and firm-level outcomes. After providing evidence of compliance with the law, we find that the wages and hours worked of older women (those required to work additional years) were virtually unchanged. However, firms employing older female workerssignificantly reduced their hirings, especially of younger female workers. Moreover, we find evidence that those firms lowered their output but not output per worker.