Demographic Research (Sep 2013)
Do small labor market entry cohorts reduce unemployment?
Abstract
BACKGROUND Germany, like many OECD countries, faces a shift in the age composition of its population,and will face an even more drastic demographic change in the years ahead. From a theoretical point of view, decreasing cohort sizes may on the one hand reduce unemployment due to inverse cohort crowding or, on the other hand, increase unemploymentif companies reduce jobs disproportionately. Consequently, the actual effect of cohort shrinkage on employment and unemployment is an empirical question. OBJECTIVE We quantitatively assess the relationship between (un)employment and cohort sizes. METHODS We analyze a long panel of population and labor-market data for Western German labor market regions. We isolate the direct, statistical effect of aging in a decomposition approach and estimate the overall effect by regression. In this context, we account for the likely endogeneity of cohort size due to migration of the young workforce across regions using lagged births as instrument. RESULTS The direct effect of the age composition of the labor force on unemployment is negligible.In contrast, the elasticities of unemployment and employment with regard to the labor-market entry cohort's size are significantly positive or negative, respectively. The causal effect indicates an over-elastic reaction by unemployment. CONCLUSIONS Our results provide good news for the Western German labor market: small entry cohorts are indeed likely to decrease the overall unemployment rate and thus to improve the situation of job seekers. Accordingly, we find the employment rate is positively affected by a decrease in the youth proportion.
