16
Michael Fertig and Christoph M. Schmidt
tern. This is basically what we observe for the baby boom generation. In parti-
cular, in light of current population trends, it seems very unlikely that current
baby boomers will be followed by even larger birth cohorts in the absence ofa
massive pro-immigration shift in policy.
At any point in time, age and birth cohort go hand in hand. Most prominently,
post-WWII baby boomers, now being in their late thirties or early fourties
constitute a large fraction of the population in many European countries. Sim-
ilarly, the relatively small subsequent baby bust generation is now around their
late twenties. Due to the distinct and well-researched life-cycle patterns of la-
bor market activity and success, the focus of much of empirical labor econo-
mics has been on age-related heterogeneity of relevant outcomes. From this
perspective, variations in the size of birth cohorts, through their influence on
the fate of a generation as it passes different ages, tend to alter age-related out-
come profiles in the cross-section. This is exactly the perspective taken in this
paper, following many important earlier contributions to the issue. Thus, for
the purposes of our analysis, we are identifying demographic change with
those alterations of the age structure associated with cohort size.
Consequently, we distinguish workers of different age as different factors of
production, and then focus on the relative prevalence of different age groups.
In the cross-section, age and birth cohort are related one-to-one. The funda-
mental identification condition that we maintain throughout, is that the one
and only important characteristic of any birth cohort is its relative size. It seems
sensible to think of these factors - workers of different ages - as imperfect sub-
stitutes in production. Changes in relative cohort size ofan age group directly
translate in shifts of relative labor supply of these different factors of produc-
tion. Large birth cohorts lead to relatively abundant labor supply when they
enter any age bracket, and to a corresponding reduction when they exit this
bracket again. For instance, currently the production factor medium-aged
workers is relatively abundant all across Europe, due to the widely-experi-
enced post-WWII baby boom.
In general, in a competitive setting all factors are fully employed. In equilib-
rium, more abundant factors command relatively low marginal productivities.
Thus, the relative shift in labor supply induced by an ageing population might
have an effect on the relative wages of younger and older workers and, there-
fore, on the income distribution of a society. All other things equal, as the pop-
ulation is ageing the production factor young workers becomes scarcer and the
relative wages of young workers should rise. The precise extent to which
wages of the young increase decisively rests upon the degree of substitutivity
between different age groups in the production process and the institutional
framework of the labor market. If, as we would presume, younger and older
workers are not perfect substitutes in production and labor markets were to