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

Michael Fertig and Christoph M. Schmidt

Rather, the relative income of young workers fluctuates considerably in a
fashion that seems to be related to a variety of factors. In addition to cohort
size, changes in the intensity and duration of education and correspondingly,
labor supply seem to be prime candidates for a deeper analysis. Moreover, ag-
gregate economic developments may confound the picture even further. Yet,
in a corporatist country such as Germany, we would hardly expect the relative
wages of employed workers to reflect these altered factors directly. Rather, the
wage setting process will amalgamate relative factor scarcities, the bargaining
power of different generations, and the desire to rely on a stable wage struc-
ture. These aspects and their implications for wage structure rigidity will be
addressed below.

3.2 Level and Structure of (Un-) Employment

In a corporatist economy the wages of different workers and, thus, the entire
wage structure are bound to reflect factor scarcities at least partially in the
long run. Skills, for instance, are the staple of any modern production process,
and the wage premium for skills - the return to education - has been rising in
the last decades in step with the growing importance of formal education. Yet,
by contrast to a perfectly competitive labor market, in a labor market charac-
terized by strong employer associations and unions, relative wages are not ad-
justed quickly to altered scarcities, perhaps not even completely in the long
run. Rather wages tend to be rigid, and the wage structure is likely to reflect
non-economic factors, such as the bargaining power of different factions in the
bargaining associations.

Unions led by a gerontocracy of functionaries, for instance, might not be in fa-
vor of a change in the relative wage structure to the disadvantage of older
workers, even though due to demographic fluctuations mature workers might
be extraordinarily abundant - and, thus, less productive - and young workers
unusually scarce - and, thus, more productive than before. Such a policy is
more sustainable in times of strong economic growth, when employment rates
are high, such as in the “golden era” (Crafts, Toniolo 1996) of economic growth
during the early post-WWII decades. Stable demographics do also help, since
young workers can rely on growing into the stronger bargaining position even-
tually themselves.

In times of lacking economic growth, or in an era of demographic change, sus-
taining such a stable-wage-structure policy will be more difficult, though. In
particular, groups of workers whose wages - with respect to their relative scar-
city - are set relatively high, in our example older workers, tend to experience
high unemployment rates and, once unemployed, low transition rates out of
unemployment. Incidentally, this description appears to fit many continental
European labor markets at the turn of the new century. In such an environ-

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