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



Gerontocracy in Motion?

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will only arise in the long run, since societal preferences do only change slowly
over time.

A similar strategy would be to take both the demographic change and current
systems of old-age incomes security as given, but to ensure that labor force
participations rates increase at the beginning and at the end of the workers’
career. That is, spells of education should become shorter, perhaps by intro-
ducing education fees, raising cost awareness in publicly provided education
systems. Also, early retirement programs should be abolished. To the contrary,
the mandatory retirement age should be adjusted upward to reflect the rising
life expectancies of more recent generations. Similarly, one could aim at an in-
creasing labor market participation of married women, by providing better
and more widely available child care facilities, or by programs designed to fa-
cilitate a smoother return to the labor market after a phase of home produc-
tion.

Finally, one might opt for more immigration to alter the age and skill structure
of the population. It has been demonstrated conclusively (e.g. Borsch-Supan
2002) that immigration provides a route for relieving the demographic pres-
sure currently inflicting old-age security systems of the pay-as-you-go mold,
but also that this does not provide a solution in the long run. Young adult im-
migrants quickly grow themselves from being a rejuvenating factor to being
mature members of the population. This leaves their main demographic impe-
tus to be their enhancing effects on future fertility (Schmidt 2000c). Moreover,
new contributors to the system today generate more obligations for the sys-
tems tomorrow, implying the need for a constant influx of young adult immi-
grants to make this alleviation strategy work. Thus, ultimately a reform of the
systems of social security cannot be avoided.

The second avenue for policy would be to accept the demographic change, and
to engage in reforms of those institutions which are under demographic pres-
sure. Regarding the system of old-age security and other aspects of social secu-
rity, this strategy would entail the implementation of more elements of
self-sufficiency. Specifically, these systems should rest more heavily on funding
- to the detriment of pay-as-you-go aspects. First steps in this direction have al-
ready been undertaken, for instance by recent reforms of the German pension
system. Regarding the functioning of the labor market, it would be important
to ensure that wages do increasingly reflect relative scarcities, before the large
generation of baby boomers enters the final decade of their working career.
This move might well imply breaking a gerontocratic minimum wage cartel.

In any case, labor markets working more smoothly will be an important pre-
requisite for satisfactory aggregate growth. Another key aspect for coping suc-
cessfully with an ageing population is certainly the provision of incentives for
higher human capital accumulation. This also applies to older workers, which



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