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



Michael Fertig and Christoph M. Schmidt

1. Introduction

European economic and political integration and an intense immigration ex-
perience have been important factors in the development of European societ-
ies in the second half of the past century. Undoubtedly, though, the most dra-
matic influence on European demographics has been exerted by post-war
baby booms and the subsequent baby busts, leading to massive changes in the
population age structure of all European countries. Yet, while the baby boom
cohorts have moved through the age pyramid like a tidal wave, declining fertil-
ity has caused a stable trend, population ageing.

Throughout the last decades, and recently at an accelerating pace, this phe-
nomenon has transformed the composition all European societies to a consid-
erable extent. Without exception the demographic change associated with
population ageing induces long-term societal challenges for all European
countries, albeit with some heterogeneity regarding their precise timing. In
this context, Germany provides a particularly interesting case study. Accord-
ing to World Bank projections (Bos et al. 1994) Germany will soon have the
highest share of older people in all industrialized countries. The proportion of
elderly (i.e. beyond age 65) relative to the labor force is projected to rise from
21 % in 1995 to 36 % in 2035, due to a pronounced decline in fertility rates and
a simultaneous rise in life expectancy. Other European countries following
suit are Greece, Italy, and Spain.

Most directly this demographic change will have an impact on national pen-
sion systems and their financing. With defined benefits and a rising old-age de-
pendency ratio, the prevailing pay-as-you-go systems of social security have
necessarily come under pressure. Ever rising contribution rates and increasing
uncertainty regarding the overall sustainability of the system into the future
have already eroded the previous consensus about the modern welfare state.
Furthermore, it is clear that the whole spectrum of social security systems, not
only old-age security, but also, especially the public health care system will be
affected directly by these developments. Typically, medical expenditures rise
drastically in old age, and an increasing proportion of elderly will tend to gen-
erate a more than disproportionate cost push to health care. Barring funda-
mental reform, most European countries finance the bulk of these expendi-
tures through worker’s wage-related contributions, which will have to rise ac-
cordingly.

However, the discussion frequently overlooks a series of similarly important
consequences of population ageing. After all, an ageing society tends to imply
a decline in the relative labor supply of younger as compared to older workers,
not only a simple reduction of overall labor supply and an increasing old-age
dependency ratio. Thus, the age structure of the work force is going to be al-
tered as well. Moreover, since neither school leaving age nor the age of retire-



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