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

Gerontocracy in Motion?

Schmidt (1993) analyzes the effects of the changes in the age composition of
Western Germany on the incidence of unemployment in different sex-age
groups (also Zimmermann 1991). The German wage setting process appears
tobe characterized by the presence ofa strong union movement that hampers
flexible wage adjustments. Thus, age structure variations can be expected to
lead to fluctuations in age-specific unemployment rates. In general, this intu-
ition is confirmed by the estimates presented by the author. However, a strong
positive relationship between the size of a cohort and its relative unemploy-
ment experience can only be established formally for a few sex-age groups.

The stylized model of a monopoly union maximizing the wage bill is only a
point of departure for a deeper analysis of the bargaining process, though.
Consequently, the question of how alterations of the population age structure
influence the bargaining process and its outcomes is more intricate. Spe-
cifically, it might well be that larger cohorts can exert an influence which miti-
gates the adverse effects of generational crowding. A theoretical model which
embodies such a political economy consideration is left to further research.
Yet it is already clear that any empirical analysis should take account of the
possibility that in a corporatist wage setting cohort size might influence em-
ployment rates and economic prosperity negatively as well as positively.

3.3 Human and Physical Capital Accumulation and Labor Supply

Alterations of the age-earnings profile and on the income distribution across
generations might have indirect effects through behavioral responses as well.
For instance, such a shift in the income distribution in favor of younger cohorts
might even provide an additional incentive for earlier retirement of older and
for a larger labor market participation of younger workers. Furthermore, in-
creased labor market participation of the young together with the improve-
ment of their income position could then impinge upon reproductive behavior
of these young people and induce a further decline in birth rates. The link be-
tween economic prosperity and fertility lies at the heart of population eco-
nomics, but both theoretically and empirically this issue is far from resolved.
Here we concentrate on educational attainment of the shrinking young gener-
ations and the accumulation of physical capital, leaving fertility decisions to
further research.

The shift in the structure of the economically active population towards a
higher share of older workers might impinge upon the level and structure of
savings as well as the returns to stocks and bonds. Some observers attribute the
substantial rise in US asset prices during the 1990s to the increased asset de-
mand by baby boom cohorts entering their prime earning years. Consequently,
asset prices are predicted to decline as soon as this population group reaches
retirement age and begins to reduce its asset holdings. Theoretical models (e.g.

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