Shrinking Labour Forces and Early Retirement

The withdrawal of older workers from the labour force creates a variety of economic challenges, including an increase in unused production capacity. Costs due to early retirement measured in terms of forgone output averaged 6.3 per cent of potential gross domestic product in the OECD in 1998. These costs, which vary greatly from country to country, are highest in Hungary (15.9 per cent of potential output) and lowest in Iceland (0.5 per cent). These differences are important for policy makers to the extent that their causes are rooted in economic policy and structure rather than in cultural and environmental factors. In light of these costs, this paper attempts to summarize and discuss alternative theories on why people retire early and how early retirement programs came about, in order to understand better the roots of the problem.