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Michael Fertig and Christoph M. Schmidt
ering interactions between shocks and institutions and conclude that the com-
bination of these two factors is decisive for a country’s poor labor market per-
formance. Generally, this literature suggests that the key to improvement
might lie in encompassing institutional reforms of the labor market, including
a dismantling of employment protection.
The dismal labor market situation motivated many European policy makers
to intensify their use of measures of active labor market policy (ALMP), with
the explicit aim to reduce unemployment. One important set of strategies
which also aims at reacting to the excess demand of skilled workers relies on
providing the unemployed with further vocational qualifications. However, in-
ternational experiences with the effectiveness and efficiency of ALMP mea-
sures are rather disillusioning (Schmidt et al. 2001 for an international com-
parison of measures and results, and particularly Kluve, Schmidt 2002 for a
European perspective). Therefore, one should not put too much hope into
measures of ALMP as a solution of European labor market problems. These
two issues, encompassing labor market and institutional reforms, and discre-
tionary policy measures will play a prominent role in our discussion as well.
3. Population Ageing and Labor Markets
In terms of its economic repercussions, population ageing is first and foremost
equivalent to a decline of (i) the labor supply of younger relative to that of
older workers, and also to (ii) the number of workers relative to that of retir-
ees. It seems safe to argue that this latter aspect has a direct effect on the social
security systems, especially the pension systems but also the health and
old-age care insurance (e.g. Borsch-Supan 1999 for the case of Germany). This
is the principal reason for the attention given both in the public discussion and
the academic literature to the effects of demographic processes on old-age de-
pendency ratios. The alterations of the population shares of workers and retir-
ees also holds direct and sizeable implications for aggregate labor productiv-
ity, depending on capital accumulation (Borsch-Supan 2003).
Yet, ageing also effects the composition of the active population, and thus ex-
erts important influences beyond the much-discussed hike of the pay-as-you-
go social security contribution rates. Thus, even if members of large birth co-
horts displayed the same life-cycle behavior regarding human capital acquisi-
tion and labor supply as members of small birth cohorts, would their preva-
lence tend to alter their economic prospects, and perhaps the aggregate out-
come. However, it is more than likely that this process will also display indirect
effects via behavioral responses of individuals. To provide an overview, this
section addresses the various labor market aspects emanating from changes in
the age structure of the population and the labor force.