Gerontocracy in Motion? – European Cross-Country Evidence on the Labor Market Consequences of Population Ageing



Gerontocracy in Motion?

15


We discuss the following labor market outcomes in their potential response to
population ageing (in parentheses: the central adjustment mechanism under
investigation):

- the structure of wages and the income distribution (relative scarcities),

- the level and structure of (un-) employment (imperfect competition),

- human and physical capital accumulation and labor supply (behavioral re-
sponses), and

- the organization of work and the structure of product demand (market ef-
fects).

These various direct and indirect effects are intimately related and might exert
repercussions on demographic change itself, i.e. specifically on family forma-
tion and fertility. The remainder of this section outlines the state of the scien-
tific discussion - theoretically as well as empirically.

3.1 Structure of Wages and Income Distribution

To organize ideas, we first discuss the consequences of population and labor
force ageing for the benchmark case where individuals take their life-cycle de-
cisions regarding human capital acquisition and labor supply irrespective of
the (relative) sizes of their own or other birth cohorts. Clearly, when relatively
few workers contribute to the economic activity of a large, mature population,
per-capita income will be relatively low, if higher capital accumulation does
not compensate for labor scarcity. Generally, since the number of active work-
ers is low the level of wages will tend tobe high, though. Consequently, ageing
is a phenomenon driving a wedge between wages and per-capita income. The
income distribution is then determined by the capital ownership structure as
well.

Yet, population and labor force ageing are typically highly correlated. Thus,
ageing also affects the relative structure of labor market outcomes among
workers, not only the wages of workers relative to per-capita income. In more
formal terms, it might be instructive to view each birth cohort as a different
factor of production, as compared to the more homogeneous production fac-
tor
capital2. As a birth cohort passes through the natural life-cycle, it is engag-
ing in human capital acquisition and labor market entry when young, concen-
trating on household and labor market production in medium age, and at some
point it is exiting the labor market. Large birth cohorts will tend to experience
generational crowding throughout their lives, unless a high-fertility period or
the large-scale immigration ofa subsequent birth cohort counteracts this pat-

2

A sizeable literature discusses the heterogeneous productivity of different vintages of capital
items, but this is not of any relevance to our argument.



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