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The Labor Supply and Retirement Behavior of China’s Older Workers and Elderly in Comparative Perspective1

John Giles, Dewen Wang, and Wei Cai

There is keen awareness across developed and middle-income countries of the developing world that increased longevity and aging populations will place significant and growing burdens on working age adults in the relatively near future. In the United States and other economies with pay-as-you-go social security systems, these burdens will be transmitted through fiscal systems. Even where public transfer mechanisms are not as important, working-age adults may nonetheless face increasing burdens associated with supporting the elderly through both financial and in-kind transfers.2 Increasing the retirement age is frequently viewed as one feasible means of easing burdens on working-

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1 This chapter has benefited from conversations with Fang Cai, Xiaoyan Lei, Philip O’Keefe, Albert Park, James Smith, John Strauss, Firman Witoelar, Kyeongwon Yoo, Xiaoqing Yu, and Yaohui Zhao, and also from comments of David Wise, Yaohui Zhao, and other participants in the Conference on Aging in Asia, sponsored by the U.S. National Academy of Sciences and Chinese Academy of Social Sciences (Beijing, December 9-10, 2010). We are grateful for financial support for this work from two sources at the World Bank: the Gender Action Program of the PREM Network and the Knowledge for Change Trust Fund managed by the Development Economics Vice Presidency (DEC) of the Bank. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the executive directors of the World Bank or the governments they represent.

2 Lee and Mason (2011) highlight the implications of population aging for sustainability of public and private transfer systems across Africa, Asia, Europe, Latin America, and the United States.



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6 The Labor Supply and Retirement Behavior of China’s Older Workers and Elderly in Comparative Perspective1 John Giles, Dewen Wang, and Wei Cai T here is keen awareness across developed and middle-income coun- tries of the developing world that increased longevity and aging populations will place significant and growing burdens on work- ing age adults in the relatively near future. In the United States and other economies with pay-as-you-go social security systems, these burdens will be transmitted through fiscal systems. Even where public transfer mechanisms are not as important, working-age adults may nonetheless face increasing burdens associated with supporting the elderly through both financial and in-kind transfers.2 Increasing the retirement age is frequently viewed as one feasible means of easing burdens on working- 1 This chapter has benefited from conversations with Fang Cai, Xiaoyan Lei, Philip O’Keefe, Albert Park, James Smith, John Strauss, Firman Witoelar, Kyeongwon Yoo, Xiaoqing Yu, and Yaohui Zhao, and also from comments of David Wise, Yaohui Zhao, and other participants in the Conference on Aging in Asia, sponsored by the U.S. National Academy of Sciences and Chinese Academy of Social Sciences (Beijing, December 9–10, 2010). We are grateful for financial support for this work from two sources at the World Bank: the Gender Action Program of the PREM Network and the Knowledge for Change Trust Fund managed by the Development Economics Vice Presidency (DEC) of the Bank. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not neces - sarily represent the views of the International Bank for Reconstruction and Development/ World Bank and its affiliated organizations, or those of the executive directors of the World Bank or the governments they represent. 2 Lee and Mason (2011) highlight the implications of population aging for sustainability of public and private transfer systems across Africa, Asia, Europe, Latin America, and the United States. 116

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117 JOHN GILES, DEWEN WANG, and WEI CAI age populations, and yet it is likely that exits from productive activity are shaped by household wealth and individual preferences, as well as by institutions and policy. Alternatively, continued participation in the workforce may reflect the ability of workers to learn new skills and to remain productive into older age. With an eye toward providing insight into the retirement decision in East Asia, this chapter presents descriptive evidence on retirement and labor supply patterns in China, Indonesia, and Korea. While China’s rapid demographic transition is frequently highlighted in news accounts because of the sheer size of its aging population, Korea and Indonesia are also confronting rapidly aging populations.3 In contrast to most developed countries, however, rural and urban populations face significantly different retirement systems. Differences across rural and urban areas in both retirement patterns and access to financial support are most extreme in China, where most long-term residents in urban areas have had formal wage employment, retire at a relatively young age, and receive substantial support from pensions. Rural residents, by contrast, have lacked pension support and may expect to work in farming or other agriculture-related activities until relatively late in their lives. 4 In this sense, urban residents of China with formal sector employment face retirement decisions that are more similar to those of residents in devel - oped countries. Residents of China’s rural areas, by contrast, share more in common with residents of other developing countries, and make labor supply decisions in the absence of both pension availability and the con - straint imposed by a mandatory age of retirement from the formal sector. This chapter brings together information from several data sources to highlight differences in labor supply of older workers across urban and rural China, Indonesia, and Korea, and to review patterns and trends in the context of institutional differences across these three countries and between urban and rural areas. For perspective on retirement patterns in East Asian economies, we then place the retirement decision in China, Indonesia, and Korea in the context of employment patterns of older 3 Recent research by demographers at the U.S. Census Bureau suggests that the old age dependency rates in 2020 will reach 22, 19, and 13%, for Korea, China, and Indonesia, respectively, and by 2040 these rates will rise to 53, 40, and 25% (Kinsella and He, 2009). A preliminary release from China’s 2010 census informs us that 13.3% of China’s popula - tion is now over 60 as opposed to 10.3% in 2000, while the size of the future workforce has dwindled, with individuals under 14 accounting for 16.6% of the population, down from 23% in 2000 (National Bureau of Statistics, 2011). 4 New initiatives are currently under way in rural China. A government-subsidized con - tributory rural pension piloted in 2009 will be rolled out to cover all rural counties over the next three years. In cities, a new pension scheme, modeled on the rural pension program, was first introduced in July 2011 with the aim of providing financial protection in old age to nonworking urban residents and informal sector workers.

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118 AGING IN ASIA workers in the United States and the United Kingdom. In common with findings from the retirement literature focusing on developed economies, the descriptive evidence presented in this chapter is suggestive of the role that ability to collect a pension (or social security benefit) plays in the retirement decision.5 Mandatory retirement provisions in each of these East Asian econo - mies, however, condition decisions of when and how to exit from pro - ductive activity. While significant numbers of retirees return to work in self-employed activities or informal work after reaching mandatory retirement age, the types of work that “retirees” are able to find may be unattractive for some older workers. Differences in the mandatory retire- ment age for men and women in China likely contributes to differences across genders in participation in work later in life, with important con - sequences for relative pension wealth and relative financial security of older men and women. After reviewing descriptive trends, we lay out an empirical model to examine correlates of labor supply with own and spouse eligibility to receive a pension, own and spouse health status, and proxies for house - hold wealth. We next review data sources and correlates of employment separately for China, Indonesia, and Korea. The chapter presents com - parative descriptive evidence from East Asia and highlights important questions on retirement behavior in developing countries that may be addressed from new panel data initiatives currently under way. EMPLOYMENT PATTERNS AND THE RETIREMENT OF OLDER WORKERS In China, long-term urban residents with formal sector employment can expect to receive a pension upon retirement, but face mandatory retire- ment at a relatively young age.6 Where urban employed men confront mandatory retirement at age 60, women in blue collar occupations are frequently required to retire at age 50, those in white collar occupations at 5 Blau (1994) suggests that social security eligibility contributes to relatively high exit from the labor force at age 65; Krueger and Pischke (1992) exploit design features of the U.S. social security system to demonstrate the effects of benefits on labor force participation. Gruber and Wise (1999, 2004) present evidence from Organisation for Economic Co-operation and Development economies of the effects of social security and public pension systems on labor supply decisions of older workers. 6 We define a long-term urban resident as an urban dweller with an urban (nonagricultural) residential registration (hukou) status. While considerable efforts have been made recently to extend social insurance benefits to migrants living in the city, migrants are much less likely to have employment contracts and to have employers who are making mandated contribu - tions to pension, health, and disability insurance programs (Giles, Wang, and Park, 2012).

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119 JOHN GILES, DEWEN WANG, and WEI CAI age 55, with women in some categories (e.g., university professors) able to work until age 60. Among current retirement-age residents of urban areas, a large share is receiving relatively generous pension support. By contrast, rural elderly, who had lower incomes during their working lives and less accumulated wealth than their urban counterparts (Kanbur and Zhang, 1999; Ravallion and Chen, 2007), do not typically have pension income. According to the 2005 1% population sample, 45.4% of urban residents over age 60 report pension income as their most important source of finan- cial support, but only 4.6% of rural residents note an important role for pension income. Instead, 38% of rural respondents over age 60 report that income from their own labor is their most important source of support.7 The stark difference in employment rates of rural and urban resi- dents reflects differences in both pension wealth and mandatory retire - ment provisions across urban and rural areas.8 As evident in Panel A of Figure 6-1, which presents locally weighted regression (LOWESS) esti- mates of employment rates by age, China’s rural residents are far more likely to be employed well after the mandatory retirement ages faced by urban residents. From the China Health and Retirement Longitudinal Study (CHARLS) pilot conducted in 2008, we note 45% of urban men aged 60–64 were still employed at least one hour per week (Panel A), but in rural areas nearly 86% of men in this age range were still working. The difference in employment of urban and rural women aged 60–64 was even wider, with only 16% working in urban areas and nearly 57% still employed in rural areas. If anything, the CHARLS pilot, with relatively small sample sizes in urban Zhejiang and Gansu and representative of only two provinces, may overstate the employment rates of older men and women. Also presented in Panel A of Figure 6-1 are the 1991 and 2009 estimates from the China Health Nutrition Survey (CHNS), which show a substantially lower employment rate of 31% for urban men in the 60–64 age range. When comparing employment rates across the age distribution over time using the CHNS, one observes declines for both men and women in urban 7 Additional descriptive statistics on sources of support from the 2005 1% population sub - sample are reported in Cai et al. (2012) and Giles, Wang, and Zhao (2010). 8 In defining “employment” in this chapter, we include wage employment in the informal sector, casual work, self-employed activities, and unpaid work in family-run enterprises, all of which may be important for older workers in these economies. We focus on employment as opposed to labor force participation, per se, for two reasons. Job search is often not well documented, and where it is (e.g., the CHARLS data for China), there are a vanishingly small number of respondents (five in CHARLS) aged 45 and older who are not employed but report active searches for work. We have no doubt that a search process exists for older workers who wish to work, but it is difficult to capture, and this is particularly true when large shares of older workers are self-employed.

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120 Urban Male Urban Female A. 1 1 .8 .8 .6 .6 .4 .4 Working / Total .2 .2 0 0 45 55 65 75 45 55 65 75 Age Age CHNS (1991) CHARLS (2008) CHNS (2009) CHNS (1991) CHARLS (2008) CHNS (2009) Rural Male Rural Female 1 1 .8 .8 .6 .6 .4 .4 Working / Total .2 .2 0 0 45 55 65 75 45 55 65 75 Age Age CHNS (1991) CHARLS (2008) CHNS (2009) CHNS (1991) CHARLS (2008) CHNS (2009) Urban Male Urban Female B. 1 1 tal .8 .8

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Urban Male Urban Female B. 1 1 .8 .8 .6 .6 .4 .4 Working / Total .2 .2 0 0 45 55 65 75 45 55 65 75 Age Age 1991 1997 2000 2009 1991 1997 2000 2009 Rural Male Rural Female 1 1 .8 .8 .6 .6 .4 .4 Working / Total .2 .2 0 0 45 55 65 75 45 55 65 75 Age Age 1991 1997 2000 2009 1991 1997 2000 2009 FIGURE 6-1 Employment rates by age cohort of older workers and elderly in urban and rural China. NOTE: Employment rates by age cohort are calculated using nonparametric locally weighted regression (LOWESS) with a band - width of 0.3. SOURCES: Panel A and B use data from the common provinces surveyed across waves of the China Health and Nutrition Sur - vey (CHNS) conducted from 1991 to 2009. Panel A also includes data from the 2008 China Health and Retirement Longitudinal 121 Study (CHARLS) pilot. R02177 Figure 6-1

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122 AGING IN ASIA areas, but less pronounced declines in employment rates in rural areas. 9 Rural women between age 45 and 65 were somewhat less likely to be working in 2009 than in 1991, but this does not appear to be true for older women or for rural men. One of the sharper changes from 1991 to 2009, as viewed from the CHNS, lies in the decline in employment rates of women over age 45 in urban China.10 The decline in older women’s labor force participation raises an important question for labor research in China: Does the decline in women’s employment reflect a resurgence of gender discrimination in post-reform China or the effects of increases in household wealth and the ability of women to exit the labor force at a younger age? Differences across genders in mandatory retirement ages likely create an institutional bias against women’s employment. Even in the absence of discrimina- tion, the employment decision of older women in urban China reflects a constrained choice. Women may return to work as consultants or in self- employed activities after reaching mandatory retirement age, but retired women are frequently receiving pensions, which raises reservation wages for new employment. Those urban women uninterested in working in typical self-employed activities held by blue collar workers (e.g., nannies or housekeepers) may choose to stay out of work if their pension incomes are sufficient. Earlier research on labor force participation in China has noted the drop in employment rates of urban residents, and urban women in par- ticular (Cai, Park, and Zhao, 2008; Maurer-Fazio et al., 2011) and attrib - uted the drop to the effects of state sector restructuring after 1997. After losing work during state sector restructuring, men, the young, and the well educated generally faced shorter durations out of work (Appleton et al., 2002; Giles, Park, and Cai, 2006a; Maurer-Fazio, 2007). Moreover, some researchers found that a woman’s decision to reenter the workforce was affected not only by permanent and relatively generous pensions, but also by family circumstances (Giles, Park, and Cai, 2006b). Given support available through pensions to relatively young workers 9 We review evidence from the CHNS as it is the publicly available data source that researchers used (pre-CHARLS) to study labor supply, health status, and retirement of older workers in China (e.g., Benjamin, Brandt, and Fan, 2003; Dong, 2010). As it is based on a panel of households that does not enumerate complete information on family members who have split off of households, one should be concerned that later waves of the CHNS over-represent those who remain in the households. As we are interested in the over-45 population, this is less of a problem than if we were considering the employment decisions of individuals who were children in 1991 and likely to have moved out of households. 10 Additional corroborating evidence on the decline in women’s labor force participation from the census and the China Urban Labor Survey (CULS) can be found in the expanded working paper version of this paper (Giles, Wang, and Cai, 2011).

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123 JOHN GILES, DEWEN WANG, and WEI CAI during economic restructuring and potential biases against hiring dis- placed workers relatively close to retirement age, one would expect to see sharp drops in employment of urban women from 1991 to 1997 and 2000, as is shown in Panel B of Figure 6-1. If reduced employment rates of urban women over 45 were simply the effect of restructuring in the late 1990s, however, we would expect that employment of women in the 45–55 age range would return to higher pre-1997 levels by 2009. The fact that older working-age women, who have not yet reached mandatory retirement age, continue to have lower employment rates, even after labor markets tight- ened during the 2000s, raises the possibility that exits from the labor force may be a choice facilitated by higher wealth or by increasing demands on time for nonmarket activities, such as caring for children, elderly, or other ill family members. Exits from employment among older workers as they approach pen- sion eligibility are not unusual in more developed economies such as the United Kingdom and the United States, but exit rates in the years before retirement age are not typically as high as one observes in China. Figure 6-2 highlights differences in employment rates across five countries and shows that 68 and 70% of women aged 50 to 54 are still employed in the United States and United Kingdom, respectively. Employment rates of women in this age range are somewhat lower in urban Indonesia at 63%, but above the 38 and 30% employment rates witnessed in urban Korea and China, respectively.11 Relative employment patterns of men in the 55 to 59 age range follow a similar pattern: 68 and 67% of urban men in this age range in China and Korea, respectively, are employed, while 82% of urban Indonesia men of this age are still working. Mandatory Retirement Provisions and Retirement Patterns Incentives created by gender differences in the mandatory retirement age may encourage early exits from the labor force by women, particu - larly for women who face the prospect of a job search in their 40s. Career changes and job changes later in working life can be difficult in devel - oped and developing economies alike. As beginning a new job requires learning processes, technology, and culture of the new workplace, a new employee will not reach peak productivity in a position immediately upon being hired. An employer may be less likely to consider hiring a worker who is close to mandatory retirement age simply because there is not sufficient time to earn a return on initial training and start-up costs relative to a younger worker. In the United States, where many workers 11 Note that this is the urban employment rate for women using the CHARLS sample; in the CHNS sample, the rate is higher at 42%.

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US China (CHARLS) Indonesia 124 1 1 1 .8 .8 .8 .6 .6 .6 .4 .4 .4 Working / Total .2 .2 .2 0 0 0 45 50 55 60 65 70 75 80 85 90 45 50 55 60 65 70 75 80 85 90 Age Age 45 50 55 60 65 70 75 80 85 90 Age Urban Male Urban Female Urban Male Urban Female Rural Male Rural Female Rural Male Rural Female Male Female China (CHNS) Korea UK 1 1 1 .8 .8 .8 .6 .6 .6 .4 .4 .4 Working / Total .2 .2 .2 0 0 0 45 50 55 60 65 70 75 80 85 90 45 50 55 60 65 70 75 80 85 90 Age Age 45 50 55 60 65 70 75 80 85 90 Age Urban Male Urban Female Urban Male Urban Female Rural Male Rural Female Rural Male Rural Female Male Female FIGURE 6-2 Employment rates by age cohort in China, Indonesia, Korea, United Kingdom, and the United States. NOTE: Employment rates by age cohort are calculated using non-parametric locally weighted regression (LOWESS) with a bandwidth of 0.3. SOURCES: Data from China: 2009 CHNS and the 2008 CHARLS pilot; Indonesia: 2007 Indonesia Family Life Survey (IFLS); R02177 Korea: 2006 Korean Longitudinal Study of Aging (KLoSA); United States: 2008 Health and Retirement Study (HRS); United Figure 6-2 Kingdom: 2008/9 English Longitudinal Study of Ageing (ELSA). landscape vectors, editable

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125 JOHN GILES, DEWEN WANG, and WEI CAI start to leave the workforce upon eligibility for Social Security benefits, difficulties finding new employment among older displaced workers are well documented. Research using the U.S. Health and Retirement Study (HRS), for example, has demonstrated that of workers who lose jobs after age 55, only 60% of men and 55% of women are employed again within two years, while 80% of nondisplaced workers are employed (Chan and Stevens, 2001). In China, and to some extent Indonesia and Korea, a mandatory retirement age for some occupations and types of employers is even more binding than Social Security eligibility in the United States. Differences in mandatory retirement ages of men and women in China may have a significant impact on how employers view the relative returns to hiring male and female employees who are in their 40s and older.12 In Korea and Indonesia, retirement ages are not mandated by the law, but employment laws allow for firms to set mandatory ages, and govern - ment employees and civil servants face mandatory retirement. After the East Asian financial crisis in 1997/1998, firms that had not implemented mandatory retirement started to do so as a way of slowing wage increases associated with seniority-based wage systems (Cho and Kim, 2005). The higher employment rates of older urban men and women in Indonesia and Korea (Figure 6-2) suggest that mandatory retirement from some occupations and types of employers does not mechanically lead to permanent exit from productive employment. Existing research on older workers in both countries suggests that an impending retirement creates incentives for forward-looking workers to leave employers preemptively, either to start their own businesses or to start second careers working for smaller private-sector employers.13 One significant difference across workers in urban and rural areas of China, Indonesia, and Korea lies in the share of the retirement-age workforce with access to pensions. In China, evidence from the CHARLS pilot suggests that, of urban residents aged 60 and older, 79% of men and 54% of women have access to pension support. In urban areas of Indo- 12 Of course, employers may already perceive older workers to be less productive (Chan and Stevens, 2001; Dalen, Henkens, and Joop, 2010), but this is a problem faced by both older men and women when looking for work. 13 McKee (2006) finds that in Indonesia, half of government workers move into either the private sector or into self-employment, and 61% of workers who leave their private-sector jobs move into self-employment. In Korea, self-employment was one response to lay-offs from larger employers in the wake of the 1997/1998 financial crisis (Sohn, 2007) and con - tinues to be an important source of employment for older males (Lee, 2009). Lee and Lee (2011) note differences in the retirement ages of self-employed and wage-salary earners, but do not discuss the incentive to move into self-employment ahead of mandatory retirement among wage and salary earners who wish to continue working.

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126 AGING IN ASIA nesia and Korea, by contrast, fewer than 35% of men and 15% of women have access to pensions.14 Another unique feature of pension eligibility in Korea lies with an imperfect correspondence between mandatory retire- ment age and age at which pension-eligible retirees may start receiving pension benefits. The National Pension scheme, the largest of the three main sources of pensions in Korea, does not begin paying benefits until age 60, yet a significant share of employees face mandatory retirement at age 55 (Cho and Kim, 2005). This imperfect correspondence likely increases incentives for those employees facing mandatory retirement to look for new career opportunities, including in the self-employed sector. Across rural areas of China, Indonesia, and Korea, both men and women remain actively employed until much later in their lives than urban residents. In rural areas of all three economies, agricultural production on the family farm continues to be a significant source of employment for older workers, and this is necessitated by the fact that rural residents tend to accumulate less wealth over their working lifetimes. In addition, older workers in rural China and Indonesia are far less likely to have access to pensions than their urban counterparts. Both the CHARLS and the 2005 Population Census suggest that, of rural residents over 60, roughly 5% of men and less than 1% of women have pension support. Similarly, in rural Indonesia, the Indonesia Family Life Survey (IFLS) shows that only 8% of men and 3% of women aged 60 and older have access to pensions. Rural Korea is a somewhat different matter. Efforts to bring rural residents into the National Pension scheme established in 1988 have led to pension coverage rates in rural areas that do not differ significantly from urban areas; indeed, 34% of older rural men in the 2006 Korean Longitudi- nal Study of Aging (KLoSA) wave report receiving pensions. Nonetheless, the continued labor supply of rural men is viewed as an important factor contributing to high rates of economic activity among older Koreans (Lee, 2009). In spite of availability of pensions, levels of support are not suf - ficient to permit retirement of the rural elderly. Lee (2009) suggests that the out-migration of the young has left elderly who remain behind with both a lack of young labor and insufficient wealth to cease productive activity. Given that the history of rapid urbanization in Korea mirrors the process of rural-to-urban migration taking place in China, one might be concerned that incidence of delayed retirement of China’s rural farmers, who are less affluent and have lacked pension support, may follow a similar pattern to Korea. 14 More specifically, in Korea, 34% of urban men and 15% of urban women have access to pensions; and in Indonesia, 27% of urban men and 10% of urban women have access to pensions. Figures on pension coverage are drawn from the 2006 wave of KLoSA and the 2007 wave of IFLS.

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137 JOHN GILES, DEWEN WANG, and WEI CAI Indonesia (IFLS) Korea (KLoSA) Urban Rural Urban Rural Male Female Male Female Male Female Male Female 0.021** 0.075*** 0.023*** 0.032*** –0.058*** –0.051*** –0.015 –0.023* (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.02) (0.01) –0.000*** –0.001*** –0.000*** –0.000*** 0.000*** 0.000*** –0.000 0.000 (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) –0.009 –0.015** –0.002 –0.004 0.011 0.008 0.031** 0.018* (0.01) (0.01) (0.00) (0.01) (0.01) (0.01) (0.01) (0.01) 0.000 0.002*** 0.000 0.000 –0.000 –0.000 –0.002** –0.001* (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) –0.238*** –0.246*** –0.132*** –0.126* –0.107*** –0.021 –0.039 0.014 (0.03) (0.05) (0.03) (0.07) (0.02) (0.03) (0.04) (0.05) –0.119** –0.040 0.103 –0.055 –0.051 –0.040* 0.043 –0.070* (0.05) (0.04) (0.08) (0.05) (0.05) (0.02) (0.10) (0.04) –0.004 –0.010*** –0.000 –0.003 0.007*** –0.009*** –0.001 –0.000 (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.01) (0.01) 0.002 –0.001 0.002 0.003 0.017** –0.016*** 0.008 –0.024 (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.02) (0.02) 0.011 0.029** –0.003 0.005 0.008 –0.011 0.031 –0.017 (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.02) (0.02) –0.006** –0.003 0.009* 0.007** (0.00) (0.00) (0.00) (0.00) –0.100*** –0.068*** –0.066*** –0.072*** –0.035*** –0.013** –0.066*** –0.008 (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.02) (0.01) –0.110*** –0.070*** –0.135*** –0.093*** –0.033*** –0.007 –0.036*** –0.026* (0.02) (0.02) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) 1,505 2,004 1,613 2,161 3,413 4,356 1,005 1,262 0.328 0.133 0.316 0.154 0.384 0.169 0.247 0.192

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138 AGING IN ASIA women. A rural woman married to someone with a pension is likely to be in a much wealthier household. Pension recipients in rural areas tend to be retired cadres with much greater lifetime savings. Lack of an effect of spouse pension eligibility on employment of women in urban China likely reflects the fact that urban women, who are 5 to 10 years younger than their spouses, are frequently pension-eligible and already out of the labor force. A husband’s pension eligibility does not have an independent effect on labor supply. Work and Health Status For those workers in developing countries involved in manual tasks, such as work in agriculture, we would expect to observe a strong rela- tionship between health status and labor force participation. From the results shown in Table 6-2, health status has a far more pronounced effect on work activities of China’s rural residents than urban residents. A one standard deviation increase in the Difficulty-ADL z-score is associated with 7.5% and 7.2% declines in probabilities of working for rural men and women, respectively, and a one standard deviation increase in the ADL- Unable z-score is associated with an 8.0% reduction for men and 5.0% reduction for women. In contrast to China, decline in physical functioning has a negative effect on work status of men and women in both urban and rural areas of Indonesia. Given that urban residents of Indonesia tend to work until much later in their lives, frequently in self-employed activities, the difference in importance of health status between urban residents of China and Indonesia makes sense. China’s urban residents retire before marked declines in physical functioning. Finally, in Korea, poor health status has a statistically significant negative effect on employment of men in both urban and rural areas, but the effect is more pronounced in rural areas where work is likely to be more strenuous. Family Care Provision and Employment? One frequently raised hypothesis concerning the exit of older women from the labor force lies with growing demands for provision of elder care and care of grandchildren. In order to reduce potential bias, the models estimated in Table 6-2 use numbers of living parents and grandchildren, respectively, rather than presence of parents or grandchildren as house- hold members as covariates. This distinction is important as a significant negative correlation when an elder is present in the household may lead to misleading causal interpretations if arrangements for care-provision

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139 JOHN GILES, DEWEN WANG, and WEI CAI and older worker labor supply are jointly determined.24 The lack of a systematic negative relationship between employment of China’s older urban workers and the number of family members for whom they might provide care, suggests that the explanation for decline in women’s labor force participation lies elsewhere. In Indonesia and Korea as well, the composition of the extended family does not seem to be strongly and systematically associated with labor supply and retirement decisions. Interdependence of Spouse Retirement Decisions In Table 6-2, we present results from estimates of model (2), which provide insight into the joint retirement decisions of spouses and the role of spouse health status in retirement. Across rural and urban areas of China, Indonesia, and Korea, men are more likely to work if their spouses are working as well. In urban China, where the effect of a spouse working is associated with a 19.6% and 20.2% higher probability of employment for men and women, respectively, one policy implication of joint retire- ment decisions is that efforts to encourage retirement at older ages for both men and women will likely have a positive impact on employment of spouses (Falkinger, Winter-Ebmer, and Zweimuller, 1996). Moreover, in rural China and both urban and rural areas of Indonesia, we find that a woman’s employment is more strongly correlated with spouse work status than men’s. In part, this reflects the youth of wives relative to their husbands and the likelihood that women will choose to retire at roughly the same time as their older husbands when there are (effectively) no gen- der differences in mandatory retirement and pension eligibility ages. In Korea, we observe a positive correlation between employment of men and the work status of wives in urban areas, but a strong and roughly equal positive association between the employment of husbands and wives in rural Korea, which likely reflects joint decisions to retire from farming among older rural Koreans. Employment and Spouse Health Status Inclusion of Spouse Difficulty-ADL and Spouse Unable-ADL z-scores among covariates in model (2), and presented in Table 6-2, allow us to shed light on the relationship between spouse health status and respon- 24 Research using census data, which is unable to control for endogeneity of household composition, provides weak evidence that eldercare and childcare may explain a small share of women’s exits from the labor force (Maurer-Fazio et al., 2011). Giles et al. (2006b) find that urban women are more likely to work if they have a college-age adult child, which may reflect a labor supply response to the sharp increase in postsecondary tuitions after 1996.

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140 AGING IN ASIA TABLE 6-2 Spouse Health and Work Status in Labor Supply Decisions of Adults Aged 45 and Older Linear Probability Models, Dependent Variable: Worked at Least One Hour per Week China (CHARLS) Urban Rural Male Female Male Female Pension Eligible –0.134* –0.194*** –0.127* –0.031 (0.08) (0.06) (0.07) (0.12) Spouse Pension Eligible 0.106 0.087 0.084 –0.136** (0.07) (0.08) (0.10) (0.06) Spouse Working 0.196*** 0.202*** 0.121*** 0.193*** (0.07) (0.07) (0.03) (0.04) Ln(Housing Wealth P.C.+1) –0.062** –0.001 –0.007 –0.026 (0.03) (0.02) (0.02) (0.02) ADL Z-Score (w/difficulty) –0.061 –0.027 –0.083*** –0.083*** (0.04) (0.03) (0.01) (0.01) ADL Z-Score (unable) 0.005 –0.005 –0.079*** –0.048*** (0.04) (0.03) (0.01) (0.01) Spouse ADL Z-Score (w/difficulty) 0.068 0.031 0.031** 0.052*** (0.04) (0.04) (0.01) (0.02) Spouse ADL Z-Score (unable) –0.016 –0.014 0.003 0.003 (0.05) (0.04) (0.01) (0.02) Observations 256 236 1,000 1,103 R-squared 0.489 0.482 0.320 0.343 NOTES: These regression models include age, age-squared, years of education, years of ed- ucation-squared, average education of spouse and adult children, number of living grand- parents, number of grandchildren, indicator variables for married, for spouse information not present and for no adult children, and city dummies (China: county; Indonesia: Kabupaten; Korea: metropolitan city and province). Standard errors in parentheses. * denotes p < 0.1; ** p < 0.05; *** p < 0.01. SOURCES: Calculated using the 2008 CHARLS pilot (China), 2007 IFLS (Indonesia), and the 2006 KLoSA (Korea).

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141 JOHN GILES, DEWEN WANG, and WEI CAI Indonesia (IFLS) Korea (KLoSA) Urban Rural Urban Rural Male Female Male Female Male Female Male Female –0.235*** –0.240*** –0.129*** –0.136* –0.104*** –0.020 –0.008 0.024 (0.03) (0.05) (0.03) (0.07) (0.02) (0.03) (0.03) (0.05) –0.104** –0.015 0.110 –0.028 –0.050 –0.037* 0.047 –0.061* (0.05) (0.04) (0.08) (0.05) (0.05) (0.02) (0.09) (0.03) 0.047** 0.091** 0.088*** 0.231*** 0.054*** 0.025 0.354*** 0.339*** (0.02) (0.04) (0.02) (0.05) (0.02) (0.02) (0.03) (0.03) 0.002 –0.001 0.002 0.003 0.018** –0.016*** 0.015 –0.023 (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.02) (0.02) –0.101*** –0.069*** –0.063*** –0.071*** –0.034*** –0.012* –0.062*** –0.007 (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) –0.107*** –0.070*** –0.133*** –0.093*** –0.032*** –0.007 –0.038*** –0.019 (0.02) (0.02) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) 0.016 0.005 –0.020** 0.031** –0.016 0.003 0.005 0.008 (0.01) (0.02) (0.01) (0.01) (0.01) (0.01) (0.02) (0.01) 0.030 –0.052 0.008 0.016 –0.011 –0.008 –0.038 0.016 (0.02) (0.03) (0.01) (0.02) (0.01) (0.01) (0.03) (0.01) 1,505 2,004 1,613 2,161 3,413 4,356 1,005 1,262 0.332 0.138 0.330 0.164 0.386 0.169 0.329 0.265

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142 AGING IN ASIA dent work decisions. Similar to the relationship with own health status, we find no correlation between spouse health status and employment in urban China. In rural China, by contrast, increases in the number of functions that a spouse has difficulty performing (Spouse Difficulty-ADL z-score) are positively associated with labor supply, suggesting an added worker effect dominates. A one standard deviation increase in the Spouse Difficulty-ADL z-score is associated with 3.1% and 5.2% increases that men and women, respectively, will be employed. The gender difference in the added worker effect, evident in rural areas of China and Indonesia, stands in contrast to the results using data from the U.S. Health and Retirement Study, which suggest that shocks to health of a spouse have a small positive effect on labor force participation of men and no effect on women (Coile, 2004a). While results for the United States can be inter- preted as suggesting that there is little opportunity to smooth income loss associated with health shocks through the labor market (as Coile concludes), the employment response for both genders in rural China and men in rural Indonesia likely reflects both a stronger need to smooth income and fewer constraints to returning to work on the family farm than when looking for formal wage work. CONCLUSIONS As in other regions of the developing and developed world, popu- lation aging in China raises the prospect that both formal and informal mechanisms for supporting the elderly will come under strain over the next 20 years. In common with Indonesia and other developing countries, however, China is experiencing population aging at lower income levels and prior to the extension of pensions to rural residents and to urban residents in the informal sector. In a sense, China has two retirement systems: a formal system, under which urban employees receive generous pensions and face mandatory retirement by 60, and an informal system, under which rural residents and individuals in the urban informal sector rely on family support in old age and have much longer working lives. The retirement patterns presented in this chapter illuminate the employ- ment context for the decisions that China’s policymakers are currently facing as they work to extend new pension programs in rural areas and to the urban informal sector. Several issues warrant consideration when thinking about employment-related policy for an aging population. First, as researchers have found in the United States, the United Kingdom, and Organisation for Economic Co-operation and Develop - ment (OECD) economies, we observe a strong association between pen- sion eligibility and exit from productive employment in China, Indone- sia, and Korea. Moreover, in rural areas of China and Indonesia, where

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143 JOHN GILES, DEWEN WANG, and WEI CAI work is physically demanding, we observe a strong correlation between employment status and physical functioning abilities. In China, this raises concerns that the “ceaseless toil” characterization of rural elderly lives (Davis-Friedman, 1991) may remain accurate for a significant share of the rural elderly population. China’s government has taken steps recently to improve pension support for the elderly. In 2009, a Rural Pension Pilot scheme was rolled out, and current plans are to extend it to all counties before the end of the 12th Five-Year Plan in 2012. The New Rural Pension Plan is a contributory plan with matched public contributions. Partici - pants are eligible to receive the pension at age 60 with 15 years of contri- butions (or an equivalent buy-in).25 Receiving pensions from these sources would not contain a mandate that the recipient stopped working, but also the income would facilitate reduced work, whether complete or gradual. Second, the gender disparity in mandatory retirement and pension eligibility ages for formal sector workers creates strong incentives for women to exit productive work at younger ages. While labor force partici- pation rates of women are similar to those of men at younger ages, they fall precipitously after age 40. The evidence presented and reviewed in this chapter suggests that the probability an urban woman is employed is strongly related to pension eligibility, which also corresponds to work - ing for an employer enforcing mandatory retirement. Changing the age of pension eligibility rapidly may cause hardship for those women who are close to the current retirement age and want to retire, but allowing women to retire at the same age as their male counterparts would remove an obstacle that women face relative to men when looking for work later in life. In Indonesia and Korea, where there is no difference in mandatory retirement ages for men and women in the civil service or formal sector, women’s labor force participation also declines after 45, but these declines are not nearly as steep as those observed for urban Chinese women. Apart from the disparity between mandatory retirement age for men and women from government and formal sector employers, retirement ages are quite low for those with formal sector employment in urban China. Given the rate of population aging, the argument that mandatory retirement is important for providing opportunities for younger workers makes less sense.26 Indeed both macroeconomic and fiscal considerations warrant encouraging workers to remain employed until older ages. As noted above, eliminating (or raising) mandatory retirement ages will be 25 Tocover the urban informal sector (the self-employed and workers whose employers are not participating in employer-based programs), a New Urban Residents Pension Scheme was announced in June 2011, with roll-out of pilots beginning in July 2011. 26 Gruber and Wise (2010) raise questions as to whether older and younger workers are substitutes, and the extent to which raising retirement ages could limit opportunities for new entrants into the workforce.

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144 AGING IN ASIA less problematic than increases in the age of pension eligibility, but both are likely to be unpopular because they force changes in expectations and long-term planning. One politically palatable approach may be to gradually raise the retirement age in three-month increments. Were such a reform started during the 12th Five Year Plan period, the retirement age for men would reach 65 by 2030, though it would take longer at this pace for full equalization for women. Research conducted in the United States and Europe, however, suggest that one might provide incentives within the pension system to encourage retirement later in life.27 Moreover, cor- relations in retirement of spouses, reflecting coordination of retirement planning, raises the prospect that eliminating disincentives for women to remain in the labor force after 50 may encourage delayed retirement of their husbands as well.28 Among older residents who work, the paper has shown that reduc- tions in work hours are quite gradual. A key area of employment experi - mentation in OECD countries is through introduction of flexible work arrangements, accompanied by removal of mandatory retirement ages and promotion of “job-sharing,” which has received positive reviews as a component of labor market reforms in Germany. China could benefit from assessment of international lessons and expansion of pilots domestically in these areas.29 While this study has focused primarily on the relationship between pension eligibility, mandatory retirement, and work activity, the positive relationship in urban China between educational attainment and contin - ued employment at the high end of the education distribution (for those with more than high school education) reflects the possibility that workers with more skills, or with the ability to learn new skills, may find it easier to work at older ages. In a review of policies followed in Europe, the OECD has recognized this phenomenon and noted that support for skills- upgrading at mid-career can be attractive for employers and employees alike, and may help to enhance the skills and employability of workers later in their careers. 27 Coile and Gruber (2007) find that changes in expected Social Security benefits in the United States have an impact on retirement planning well ahead of retirement. Gustman and Steinmeier (2009) and Vere (2011) find that changes in social security rules or benefits help to increase the labor force participation of older workers, and may even lead to increases in hours worked “after retirement” in one’s 70s. Robalino et al. (2009) suggest that changes to social insurance policies in Brazil could have an important impact on the labor supply and retirement decisions of older workers. 28 Falkinger, Winter-Ebmer, and Zweimuller (1996) find that increasing the retirement age of women through social security reforms may lead to longer working lives for men as well. 29 OECD (2006) provides a useful review of policies and approaches to reducing barriers and disincentives to continue working.

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