The Past and Future of the Age Discrimination in Employment Act

The Age Discrimination in Employment Act (ADEA) prohibits employment discrimination on the basis of age. While the original 1967 law covered workers aged 40 to 65, subsequent amendments first raised and then eliminated the upper age limit, ending mandatory retirement for nearly all workers.

How has the ADEA affected U.S. labor markets in the forty years since its passage? Is the ADEA well positioned to meet the challenge of population aging in the coming decades? These questions are the subject of a new working paper by researcher David Neumark, "The Age Discrimination in Employment Act and the Challenge of Population Aging" (NBER Working Paper 14317).

The author begins with some background information on the ADEA. The Equal Employment Opportunity Commission (EEOC) is responsible for federal enforcement of the ADEA. Individuals with a complaint file a charge with the EEOC, which investigates and may either dismiss the charge, seek a settlement, or file suit against the employer. In 2006, about 23,000 charges were filed under the ADEA, representing 16 percent of all discrimination charges filed with the EEOC.

Among the ADEA-related charges, disputes over terminations were much more common than disputes over hiring or other issues like wages or harassment. The relative paucity of hiring cases could indicate that there are few instances of hiring-related discrimination. Alternatively, it could be that workers are less likely to pursue such cases because they are more difficulty to prove or have lower damages than termination cases or because it would not be appealing to the worker to have the firm forced to hire him or her.

What evidence is there to suggest that there is age discrimination in employment and thus that the ADEA is needed? While reliable evidence is hard to come by, perhaps the most compelling comes from audit (or correspondence) studies, in which matched pairs of applicants (or resumes) with similar characteristics except for age apply for jobs and their labor market outcomes are compared. These studies find worse outcomes for older workers, though one problem is that it is hard to make the applicants similar in all respects except age, since an older applicant will have (or be expected to have) a longer work history. Another study, based instead on survey evidence, finds that older workers who report that their employer favors younger workers have lower wage growth and plan to leave the labor force sooner. Overall, the author interprets the evidence as indicating that even after the passage of the ADEA, labor markets are still characterized by discrimination against older workers.

Are age discrimination laws helpful in combating this phenomenon? One useful way to explore this is to compare the employment rates of older workers in states that did and did not enact age discrimination laws paralleling the ADEA, in the period before the ADEA was enacted. Studies using this approach by the author and others have found that these laws increased the employment rate of workers age 60 and above quite substantially. These studies do not identify the mechanism for higher employment rates, which could include a reduction in terminations of older workers or an increase in their hiring. Paradoxically, however, the ADEA could in fact deter the hiring of older workers by making it harder to terminate them. The author carefully considers the small literature on this question and concludes that it does not support this theory, though he notes that the logic of the argument and hence the hypothesis may still be correct.

An interesting critique of the ADEA comes from the literature on optimal employment contracts. A seminal paper argues that because of the difficulty of monitoring workers' effort, firms use pay schemes to create incentives to work hard. According to the theory, workers and firms enter into implicit long-term contracts that pay workers less than what their output is worth to the firm when they are young and more than what it is worth when they are old. Firms use mandatory retirement to prevent workers from working past the point when they have been fully paid for their work. By ending mandatory retirement, the ADEA may have made it more difficult for workers and firms to enter into such contracts and thereby harmed both parties, even if age discrimination laws boost the employment of older workers. However, as the author notes, in the absence of the ADEA, firms could more easily terminate employment before workers had received the full value of their services, and thus the ADEA may have actually strengthened such contracts. The author finds that earning profiles were steeper for cohorts entering the labor force after the passage of the ADEA, which supports the latter view.

What does the challenge of population aging mean for the ADEA and how might the ADEA allow the U.S. to better deal with this challenge? The ADEA can encourage the continued employment of older Americans who want t work, resulting in lower public expenditures on health insurance, retirement benefits, and income support. In contrast to other policies that could be used to encourage workers to work longer, such as increasing the eligibility age for Social Security, the ADEA can increase the welfare of those workers who want to keep working. The greatest potential for boosting employment is among workers over age 65, whose employment rates are currently quite low, so figuring out how the ADEA affects them in particular is of prime policy importance. Many older workers spend a period of time at a non-career or "bridge" job prior to retirement. Since older workers must be hired into these jobs, it will be important to determine whether the ADEA serves to facilitate or discourage the hiring of older workers.

The author closes by touching on two issues related to the ADEA and the employment of older individuals that are likely to become more important in the future. The first concerns the high health care costs of older workers, which can be a deterrent to their continued employment. One option that may be worth considering is changing EEOC rules to make it easier for employers to cover Medicare-eligible workers under a combination of their own group health plan and Medicare, even if that might entail differences in benefits for older and younger workers. The second concerns work-limiting disabilities, which rise with age. Workers with disabilities may file a charge with the EEOC under either the ADEA or the Americans with Disabilities Act (ADA). The ADA offers greater protection, and this could make employers reluctant to hire older workers. The interaction between the ADA and the ADEA is a fruitful area for future research.

In conclusion, the author notes "the coming decades will witness sizeable increases in the share of the population aged 65 and over, an age range in which many workers leave their long-term career jobs and move into part-time or short-term jobs. As a consequence, potential problems stemming from age discrimination in hiring may become more important than they have been in past decades. The evidence on both the enforcement and effectiveness of the ADEA is troublesome in this regard, because it suggests the ADEA may be relatively ineffective with regard to hiring of older workers. There may be limitations on how effectively the regulatory and legal system addresses discrimination in hiring, and it would be useful to consider whether this effectiveness can be increased."

The author gratefully acknowledges support by the AARP.