Labour Economics
European ageing

Much of the empirical literature on the effects of population ageing has focused on the arrival of the 1950s `baby boomers' on the relatively competitive US labour market in the early 1970s, which apparently reversed of age-earnings profiles to the detriment of younger workers. With full employment of all factors, technology and variations in factors' availability determine the wage structure; but European labour markets are less competitive, so variations in the availability of workers of different ages may affect both wages and employment.

It is well known that older workers tend to stay in jobs for longer and that individuals' turnover propensity reduces with age. In Discussion Paper No. 693, Research Affiliate Christoph Schmidt calculates the proportions of seven age groups in the total West German population aged 15-64 during 1967-89 to investigate whether these relations vary systematically with population changes. Births rose from the mid-1950s to the peak of the `baby boom' in 1964 and then declined dramatically. Average age rose from 34 in 1950 to 39 in 1987, with the male population `artificially' held younger than the female by inflows of young immigrants.

Regressing the unemployment rate of each sex-age group on the corresponding sex-specific aggregate unemployment rate, Schmidt finds that the coefficient of the aggregate rate is above unity for the young but below for older groups, while those aged 45-54 and 55-59 fare best in terms of relative unemployment. Aggregate unemployment is the most important determinant of unemployment for all groups, but at least one more integrated variable drives the long-term relationships among their unemployment rates. Including measures of own cohort size alone yields no clear relationship, but including measures of the cohort sizes of the two adjacent cohorts as well yields a positive long-term relation between own and adjacent cohort size and allows the calculation of relative unemployment for most age groups. Deviations from this long-run relationship affect adjustments of age-specific unemployment rates negatively and own past changes affect them positively for both men and women.

Schmidt notes that variations in age structure may affect unemployment significantly for teenagers as well as for adults in an economy with centralized wage-setting involving strong unions. In an ageing society, in which large, older cohorts experience relatively high unemployment, government policies to reverse the trend to early retirement may alleviate pressure on the social security system but lead to higher unemployment among the old. Immigration may offset labour force ageing but raise the share of unemployment borne by younger age groups, so policy to counter population ageing should contain provisions to mitigate its negative effects of generational crowding.

Ageing and Unemployment
Christoph Schmidt

Discussion Paper No. 693, August 1992 (HR)