Managing the Aging Workforce

TABLE OF CONTENT

1. Introduction
1.1 Motivation and objectives
1.2 Scope and structure
1.3 Definition of terms

2. Demography and characteristics of an aging workforce
2.1 Changing age structures
2.2 Impacts on the economy and companies
2.3 Prejudices and performance reality of older workers
2.4 From the deficit model to the competence model

3. HRM and demographic change
3.1 Corporate culture
3.1.1 Promoting an age-neutral culture
3.1.2 Age diversity management
3.2 Age structure analysis
3.3 Selected HRM approaches
3.3.1 Recruitment
3.3.1.1 Obstacles of traditional strategies
3.3.1.2 Adapted recruiting strategies
3.3.2 Personnel development
3.3.2.1 Importance and obstacles of training
3.3.2.2 Adapting training methods
3.3.2.3 Carrier development
3.3.3 Personnel placement
3.3.3.1 Work-ability- index (WAI)
3.3.3.2 Work place design
3.3.3.3 Work- time models
3.3.4 Leadership
3.3.5 Occupational health management

4. Best practice
4.1 BASF – “Generation@work“
4.2 BMW – “Heute für Morgen”
4.3 Review on best practice

5. Conclusion
5.1 Summary and critical review
5.2 Conclusion and outlook

LITERATURE

1. Introduction

In politics as well as in media and in social linguistic usage ‘aging society’ is a meaningful term. Since many years sociological scientists are warning against the impact of the demographic change. This social problem confronts among others governments, municipalities, welfare services and especially the economy. On current trends in the middle of the century 39.5% of the German population will be older than 60 (UN population division 2008). People live a longer and healthier life and also birthrates significantly declined over the past 20 years. Even migration in developed countries like Germany can only slow down the aging process. Subsequently, there will be a reduction of the supply of labor and a dramatic change in the age- related composition of the workforce.

Businesses worldwide in developed countries are facing the challenge to manage the aging skilled workforce. Executives find out that their companies will encounter a wave of retirements in the next decade as the ‘baby boomers’ of the post World- War II era reach retirement age. Simultaneously, the younger workforce has different expectations and work values than the older generation. Beside these trends businesses face losing significant numbers of experienced employees by retirement and with them lots of skills and qualification potential disappear. Thus, a substantial loss of knowledge will take place, if nothing will be done against it. In order to maintain competitiveness a ‘war of talents’ will affect businesses worldwide. The battle for so called high potentials shows dramatically the consequence of the fact, that a skilled workforce will be the scantiest resource for a successful business.

1.1 Motivation and objectives

Our aging society takes effect on all areas of life - on political, social and economical areas. Hence, the aging of the population affects the aging of employees in the companies. In spite of this knowledge, published many years ago, the personnel policy of most companies still orientates towards younger people as a potential workforce. Older employees often are discarded when they reach a certain age. A study conducted by Bertelsmann Stiftung found out that in 2002 about 10% employees of an age between 55 and 64 were unemployed. While innovation and competitiveness are related to the younger generation the older ones have to face prejudices against themselves (Bertelsmann Stiftung 2004, p. 7). Decisions of personnel managers affecting older employees come along with prejudices like frequent sickness, lack of motivation, decreased performance and some even promote that they have neither any willingness nor the ability to learn anything new.

For companies today it’s more necessary than ever to realign their demands on employees because of the demographic change and the preceding impacts on the workforce. Executives as well as Human Resource managers should abandon their prejudices and replace it with a new way of thinking towards the changing composition of the staff.

Meanwhile, especially production- intensive concerns became aware of their aging workforce with all its impacts and try to develop concepts and measures to meet this problem. Nevertheless there is a high number of companies which doesn’t foresee the danger rising up on the horizon of about 10 years or simply do not know how to face this development. Specialist in the company to minimize negative impacts or even to benefit from an aging workforce is the Human Resource Management. Supported by a changing corporate culture with the strategic aim to develop an age neutral culture, HRM faces a long term challenge.

Thus, on the one hand the leading motivation for this thesis is the fact that every one of us is an aging worker and has a justified interest in the way contents, conditions and environment of jobs, payment and retirement will probably change. On the other hand nowadays we already see that even skilled workers above a certain age are sorted out or do not manage to enter the job market again after a time of unemployment. The reason for treating aging employees like that might lie in the mentioned prejudices. Therefore, one part of my motivation is also to clean up with an outmoded way of thinking and a one-way-orientation towards the younger generation. Furthermore, the topic of an aging workforce today affects profit as well as non- profit organizations and represents a topic under currently discussion. Another motive force to survey this challenge is to show possible solutions and perhaps to contribute a small part in order to create more awareness to this problem.

Leading questions and objectives of this paper of course derive from arising challenges caused by demographic shifts. Thus, the first objective is to clarify the true extent of demographic changes in Germany and what impacts it brings with it. Generally, the prejudice prevails that older employees’ work ability and performance decreases with advanced age. This paper aims to find out about myths and realties of work ability as well as strength and weaknesses of elder workers. A further leading question is what role corporate culture plays in this context and how it must be converted to make positive contributions with regards to managing an aging workforce.

Demographic shifts lead to a changed composition regarding a company’s age structure and to challenges for Human Resource Management. Therefore, the main objective of this paper is to show where selected Human Resource approaches have a need to be adapted with reference to changing personnel conditions and what measures might fulfill these needs.

Summing up, the intention of this paper is to show how challenges of an aging workforce can be managed successfully.

1.2 Scope and structure

Due to the variety of demographic challenges the scope of this paper has to be limited. Main object is the impact of demographic shifts on companies respectively the challenges that are associated with Human Resource Management. This paper considers the company as a central point where the foundations for coping of demographic changes are laid. Because of this, the following descriptions are restricted to an occupational view, so that political or legal measures or those of social insurance carriers, unions and other associations aren’t discussed in this paper. Generally, German companies belonging to production- intensive branches are focused. This paper doesn’t claim to be complete because only selected HRM approaches and best practice examples are presented.

First of all with the terms “aging workforce” and “Human resource management” as well as older employees respectively workers are defined.

Chapter 2 is about demography and characteristics of an aging workforce. The development of German age structures, impacts on the whole economy or certain branches or companies are described. In order to understand arising personnel challenges, myths and realties about work ability of older employees will be discussed. It concludes with the explanation of the aging deficit model to the more modern approach of the competence model.

The main part starts with the corporate culture approach and focuses on the one hand the promotion of an age- neutral culture and on the other hand describes age diversity management. Before selected HRM approaches are presented, it’s pointed out why it’s recommended to start with carrying out an age structure analysis.

The first HRM approach is recruiting. Content of this chapter are traditional recruiting strategies and its barriers, new recruiting channels and an extended focus as well as adapted strategies for an aging workforce. The chapter of personnel development includes the general importance of further training and its obstacles for older employees. Further, age-based training methods and alternative career path are highlighted. The work-ability- index according to the Finnish industrial psychologist Juhani Ilmarinen is described in the first place in the chapter of personnel placement. Additionally, the importance and suggestions of work place design and working- time models are presented here.

Then, the significance of leadership with its various forms and changed challenges with regard to an aging workforce is discussed. Finally, the chapter occupational health management presents age-based measures of health promotion as well as health and safety protection measures.

Two examples of practical implementation of selected HRM approaches are given in chapter 4. Best practice programs with reference to an aging workforce are presented by taking the examples of BASF and BMW, followed by its critical review.

Chapter 5 summarizes the gained knowledge of this paper. Finally a conclusion and future outlook is given.

1.3 Definition of terms

Before discussing the impact of demographic shifts and an aging workforce, first of all it has to be defined what this term exactly means in this context. A general accepted definition of ‘aging workforce’ cannot be found in literature (North 2007, p. 18). Obviously, there are great differences in approaches and views of labor market researchers about the question as to what age one can refer to an aging workforce respectively aging employees or workers. Furthermore, no agreement could be found yet to determine criteria that identify the aging workforce. Against this backdrop, at first the term ‘aging workforce’ is split into the two words ‘aging’ and ‘workforce’ and then various approaches of aging employees are discussed.

‘Aging’ as a process is the subject matter of biological, psychological, philosophical, political and of course demographical and economical sciences just to name some of them. Hence, many sciences are concerned with the topic of aging, a universal or standardized definition cannot be found.

The World Health Organization doesn’t state a clear definition of ‘aging’, but assess that “most developed world countries have accepted the chronological age of 65 years as a definition of 'elderly' or older person […]” (WHO 2010). Though, it has to be regarded that in the UN definition of an older person is described in the context of a persons’ whole lifetime, not life-work time. Bäunig, Kubicki and Quandt (2006, p. 2) describe aging as “the sustainable decrease of survivability caused by intrinsic processes”. In contrast, Ilmarinen (Snel & Cremer 1994, p. 48) defines the process of aging as a dynamic process with continuous biological, structural, and psychological changes. Domres (2006, p. 23) links her definition of age to the process of aging in the working environment. Domres doesn’t regard aging as a general loss of performance, but as a “continuous transition in which the quality-profile and the work capability change and working and performance ability remains constant” (Domres 2006, p. 23). Due to the diversity of possible age-definitions it becomes apparent, that dealing with terms of age and the process of aging in the field of science leads to different statements. One reason for this fact originates from the mentioned multidisciplinary range of perspectives on the subject of age.

The term ‘workforce’ can be defined as the “total number of a country’s population employed in the armed forces and civilian jobs, plus those unemployed who are actually seeking paying jobs”. (businessdictionary.com). The American Heritage Dictionary determines ‘workforce’ comparably as “all the people working or available to work, as in a nation, company, industry, or on a project” but also narrows the term down as “the workers employed in a specific project or activity” (The American Heritage, 2009)

The definition follows the opinion to understand ‘workforce’ as the amount of people working in an organization, company, industry or project. A company’s workforce consists of individuals of all ages. The main focus in this paper is set on employees of older ages. In this context the terms ‘older’, ‘mature’ and ‘aging’ employees and workers are used synonymous. Different approaches as to what age employees and or workers are regarded as parts of the aging workforce are described below.

Hedge, Lammlein and Borman (Hedge et al 2006, p. 29) conclude that “[…] aging is a multidimensional process that is difficult to adequately depict in a single definition”. North follows the definitions of the OECD which states that older employees are in the second half of their working life, still haven’t reached retirement age but are able to work and of healthy condition (North 2007, p. 18). This wide definition only concentrates on bodily constitution, but does not enlarge upon age differentiation. Therefore, the German Institute for Employment Research spots a flowing border between the ages of 45 to 55 years to what employees or workers are regarded as aging employees (IAB 2006). The German Federal Employment Agency means employees from 50 years when referring to older employees and their problems to reenter employment.

Additionally, an important criterion assessing to what age someone is a mature worker is the organizational function a person holds to and the branch the company belongs to (Hedge et al 2006, p. 30). A common employee of 40 years may be regarded as an older employee, while an executive manager of 45 years is regarded as relatively young. A professional footballer of 35 years also belongs to the scrap heap while as a trainer he would be comparatively young.

The mentioned statements make clear that a chronological definition of an aging employee as a part of an aging workforce isn’t possible and depends on various factors. Hence, referring to aging, older or mature employees or workers, this paper mainly means person from the age of 50 years, working in common jobs of average physical exertion.

Regarding the impact of the demographic change from a present-day view, the aging workforce also could be equalized with the baby boom generation. Baby boomers that were born between 1946 and 1964 are rapidly approaching retirement and are described as the aging workforce in connection to the demographic shift (Boston College, Research Network).

Despite the popularity of the term ‘HRM’, there is still no universally agreed definition of this meaning (Watson 2002). Several definitions accent the activities and define HRM as the function “within an organization that focuses on recruitment, selection, […], training, appraisal, motivation and remuneration for the people who work in the organization. (businessdictionary.com). Few authors use ‘HRM’ as a more contemporary phrase to describe the functions of ‘personnel management’. Others see ‘HRM’ as a new approach to manage people. On the one hand HRM policies shall support the organization’s business strategy and on the other hand shall create a climate in which high motivation and cooperation is written in big letters (Beardwell & Claydon, 2010, p. 7).

For this paper both aspects are important. The strategic aspect with view on new concepts adequate for the changed workforce is as fundamental as the different functions of HRM that fulfill the proposed measures.

2. Demography and characteristics of an aging workforce

2.1 Changing age structures

Over the next 50 years global demographic structures are projected to undergo major changes (Robson 2001, p. 11). Demographic change, respectively a rapidly ageing population is regarded as one of the biggest problems in Western developed countries, especially in Europe. Since decades, Europe has the highest population proportion over 65 years of age and with the exception of Japan the world’s 25 countries with the oldest population are all in Europe (Kuné 2003, p. 17). Germany can anticipate that its population, and consequently workforce, will age substantially over the next few decades. Current trends predict that in 2060 the largest segment in the European population will be 65- to 69-year olds. Half the population is expected to be over 50 and the segment of 65 and over will be as large as the one under 15 (Federal Statistical Office of Germany 2009, p. 6).

The ageing population results from a strong decrease in the number of young people caused by the change from high birth rates (fertility) and death rates (mortality) to low birth and death rates (European Parliament 2008). This trend is labelled the term ‘demographic transition’. The underlying ‘Demographic Transition Model’ by Warren Thompson describes the population changes through 4 stages (Figure 1). Most developed countries are argued to be in stage four of the model, characterised by low birth rates and low death rates. The majority of developing countries are expected to be in stage 2 with rapidly falling death rates or stage 3 with falling birth rates. But no country is currently seen in stage 1 with high birth rates and death rates. Although the original model has just four stages it’s widely accepted that a fifth stage represents a situation where there is a natural decrease in the population, as birth rates have fallen below the death rates. Countries like Germany and Italy could be argued to be entering this stage (Caldwell 2006, p.305).

Figure 1: Demographic Transition Model

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Source: BBC

One reason for this looming change is simply that people live longer (Kuné 2003, p. 15). High-technology medical treatment and advances in health care have contributed most to the mortality reduction. Diseases and death are increasingly treated medically. Further, a rise of longevity can be expected as a result from continuing successful medical interventions. Trends towards better working conditions and above all a healthier life-style have contributed to a higher life expectancy and are expected to continuing in the next few decades. Germany has experienced a rapid decline in mortality rates since 1975 which is expected to continue into the future. A further increase in life expectancy of around five years for men and women will lead to a high growth in the number of people over 80 and subsequently to an elongation of the retirement phase (OECD 2005).

According to the 12th population projection by the Federal Statistical Office of Germany half the German population will be aged over 53 and one third will be 65 or older in 2060. Analogical to the total population the working population will considerably grow old and shrink. Today nearly 50 million people belong to the segment of the employed population. After 2020 its number will probably decrease clearly to an amount of about 40 million in 2035. In 2060 only 36 million people will be in the age of employment (Federal Statistical Office of Germany 2009, p. 11).

The European population is expected not only to live longer, but also to decrease in size over the next 50 years. Whereas significant population growth is projected in Asian and African countries as well as moderate growth in Northern America in contrast European countries have to denote a decline. Germany is expected to be one of three societies, accompanied by Italy and Spain suffering most from a significant decrease in population (Kuné 2003, p. 18).

Although the reduction in mortality rates seems to be the most obvious reason for an ageing population, several studies argue that the major cause of the looming demographic change is to be found at the beginning of the life course. According to Kuné (2003), the aging population is primarily determined by the decline in the fertility rate (births per woman) or birth rate (births per citizen) and additionally reinforced by the reduced mortality. In 2008, the European Statistics Office reported the lowest birth rate (8.2 births per 1,000 population) in the European Union and the lowest total on record since 1946 (Spiegel Online 2006) . Figure 2 compares selected birth rates of the EU27 confirming the status of Germany.

Figure 2: Extract of EU 27 birth rates 2008

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Source: deduced (own) illustration based on Eurostat Pressemitteilung 2009

The Federal Statistical Office of Germany assumes that current fertility rates will remain at this level during the next decades. In 2009, Germany had about 82.0 million inhabitants (Federal Statistical Office of Germany 2009, p. 14). Based on the constant birth rate the population is expected to decline to 70 million (median upper limit) by the year 2060. This is expected to lead to a situation where the group of over 60s (28 million or 37% of the population) will be more than twice as large as the under 20s (10 million or 16% of the population) (Federal Statistical Office of Germany 2009, p. 16).

Kuné (2003) attributes the downward trend in European birth rates to changes in reproductive behaviour which were caused by the following:

- a shift away from traditional family values
- the growing number of women in the workforce
- a well developed system of social security making children dispensable as a form of extended family-based social insurance

These determining factors of reproductive behaviour are expected to remain in the future and contribute to the fact that children in Germany are seen as ‘luxury goods’ (Kuné 2003, p. 22).

According to the Demographic Transition Model a population declines when deaths exceed births. Migration as a third factor can also contribute to the height of a population. But, although the current net migration rates in Germany accounts 2.18 migrants per 1,000, it is unlikely to compensate for the descent of fertility rates (Federal Statistical Office of Germany 2009, p. 33).

Changes in age structures can also be expressed in terms of median age or the old-age dependency ratios (Beatty & Visser 2005). The median age is the age at which half of the population is younger and half is older. It is an index that summarizes the age distribution of a population. The old-age ratio illustrates the number of people aged 65 and over, relative to the number of persons at working age. Therefore this indicates the expected changes in the age structure (Federal Statistical Office of Germany 2009, p. 20.).

Given Germany’s current demographic structure and the recent projections of fertility, mortality and migration rates, both the median age and the old-age ratio are expected to increase steeply by 2060 (OECD 2005). By the mid-2040s the median age will rise by nine years so that about half of the population will be older than 52 between 2045 and 2060. The old-age ratio on the other hand is likely to increase from currently 26% to 55% after experiencing a critical acceleration between 2020 and 2030. The ratio then is expected to rise twice as fast as in the previous decades: from 36% to 47% (Federal Statistical Office of Germany 2009, p. 21f.).

To illustrate the previously described changes in Germany’s age structure the following population pyramids are used showing the distribution of population by age in 2009 and 2060 (Figure 3).

Figure 3: Population pyramid 2009 and 2060

illustration not visible in this excerpt illustration not visible in this excerpt

Men 2009 Women Men 2060 Women

Source: Federal Statistical Office of Germany 2009

The demographic transition from high-fertility and high-mortality to low-fertility and low-mortality is illustrated by the shape which changes to a skyscraper by 2050. As shown, the population structure in Germany is expected to change dramatically in the next 50 years. As the future course of fertility, life expectancy and migration is difficult to project over the long run, demographic projections like these are always uncertain (Kuné 2003, p. 24). Nevertheless demographic trends over a period of up to 50 years can be seen as applicable. Unpredicted changes in mortality and birth rates tend not to have a big impact upon the age structure of a population. It is more likely that the demographic challenge facing Germany may be even greater than these projections suggest (The Economist 2010).

2.2 Impacts on the economy and companies

The previously described demographic evolution leads to a concentration of the workforce towards the middle of the age pyramid. By looking at the working ages, 20-64 years, it’s illustrated that the age structure of this cohort is mainly impacted by a particular generation – the baby boom generation. These people were born between 1946 and 1964 and subsequently the ageing of this generation has large impact on the German economy.

The oldest baby boomers already turned 60 in 2006 and the youngest members of them will be 65 in 2029. This generation, currently determining a group of prime-age workers might cause a dramatic change in the labour force over the 19-year period between 2010 and 2029 (Beatty & Visser 2005, p. 67). By 2020 the baby boomers will be at the ages 56 to 74 representing a group which by then might have grown by 25% between 2010 and 2020. Finally, from 2020 to 2029, the baby boom workers may stand for the largest number of people ever retired in such a short time (OECD 2009). This particular generation, far larger than the generation that follows, is moving towards retirement at a time of falling birth rates, increasing life expectancy and a decline of workers starting to work. The effect on certain industries could be substantial. In the coming three decades the workforce is expected to contract because the numbers of baby-boomers will not be replaced by middle-aged workers moving into their positions or by younger workers entering the workforce (Weinrich 2007, p. 14). If all baby boomers retire permanently from now on, the workforce in Germany will shrink dramatically. Even if the mass exodus does not happen in the next year or two, companies are facing the potential loss of their workforce in the near future (OECD 2009).

According to the OECD 2009 the workforce segment over an age of 50 is likely to increase from 30% to almost 40% in Germany up to 2020. At the same time the number of workers aged between 20 and 29 is expected to decrease (OECD 2009).

The working age in Germany today is defined as the age between 20 and 65 years. This age group nowadays comprises just fewer than 50 million people. That number will decrease after 2020. In 2030 it will amount to about 42 to 43 million people and in 2060 only about 33 million people (lower limit) will be of working age. This is a decline of 27% compared with today’s figure, assumed that the annual number of immigrants will be 200 000. If immigration totals will be only half of that amount, the potential working-age population will be even smaller in 2060: it’s 33 million (lower limit) or –34% on 2008. Table 1 illustrates the impact of the shrinking German Workforce. Hence, the level of immigration will have an impact on the extent to which the population of working age will decline (Federal Statistical Office of Germany 2009, p. 44).

Table 1: Working age population from 25 to 65 years

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Source: Federal Statistical Office of Germany 2009

The problem is not just the lack of people but in times where qualified workers will be harder to find, companies might face huge numbers of their most experienced workers retiring including their skills, training, and qualifications. The inability to recruit enough qualified workers is already threatening the performance of many companies. Whole industries are feeling the pressure of the demographic change (Dychtwald 2006 et al, p. 10). While investment banks are not able to find enough financial analysts, telecommunication companies can’t find enough trained engineers and pharmaceutical companies do not find enough research chemists. Generally it is not only a matter of costs but also time to replace skills and abilities attributed to the time lag between the demand for skills and the ability of the educational system to provide them. Consequently, companies will face a shortage of talented workers in times where workers in general, in particular experienced, skilled workers, will be in short supply (Dychtwald et al 2006, p. 10).

The most dramatic shortage of workers may hit the age group of the baby boomers in managerial and executive positions (Dychtwald et al 2006). A substantial loss of knowledge and experience is one of the most dangerous impacts and keeps going on every time a baby boomer retires. Especially in cases of specific and individualised knowledge of processes, procedures and the history of decision making in the organisation, the retirement of the baby boomers may affect the whole company. The decline in overall population does not only imply a reduction in the supply of labour but also a change in its composition. It is likely that in Germany labour services will increasingly be offered by older people (OECD 2005).

The participation rates, ratio of the currently employed population to the present population of the same age group, of worker aged 50 and older will increase from 23% in 2000 to between 32% and 39% in 2020 (OECD 2005).

Improved automation and information flow enables companies to do more with fewer people, thus, productivity increases. Economists no longer peg economic growth to labour force growth. Today’s information-based work lends itself to more extensive automation and potentially higher rates of productivity growth. Thus, a sustained rate of 2 % productivity growth will only reduce a labour shortage by two thirds (Leibold & Voelpel, 2006, p. 50).

The ageing workforce may possibly affect each company differently depending on the industry, the type of business, and the kind of workers it employs. While probably all companies may suffer from a labour shortage a manufacturing company might primarily face increased health and disability costs associated with its workers. The most pressing issue for firms in the services industries in contrast is likely to maintain the number of employees (Weinrich 2007, p. 15).

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