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Do smaller labour market entry cohorts really reduce German unemployment?

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  • Alfred Garloff
  • Carsten Pohl

    ()

  • Norbert Schanne

    ()

Abstract

In this paper we analyze the consequences of small labour-market entry cohorts on (un)employment in Western Germany. From a theoretical point of view, small entry cohorts may on the one hand reduce unemployment due to “inverse cohort crowding” or on the other hand increase unemployment if companies reduce jobs disproportionately. Empirically, several studies on cohort crowding for the USA also provide ambiguous evidence regarding the direction of the effect: labour markets may become tighter or less tight with the size of the entering cohort. The European labour market reaction on demographic changes is even less clear and the German case is especially interesting: Given the sharp decline in birth rates since the beginning of the 1970s and the relatively rigid labour market constitution, the German reaction is likely to differ from the US experience. In order to study the effect of cohort size on (un)employment, we use regional population data from the Federal Statistical Office of Germany and social security and unemployment data from the Federal Employment Agency and the IAB for the years 1978 to 2008. We account for the likely endogeneity of cohort size due to migration of the (young) workforce, using lagged birth rates as instruments. In addition, we allow for spatial autocorrelation across western German regions. Our results are good news for the (Western) German labour market: small entry cohorts are indeed likely to decrease the overall unemployment rate and thus to improve the situation of job-seekers, given the stability of the historical effect. Accordingly, the employment rate will, according to our results, increase.

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Paper provided by European Regional Science Association in its series ERSA conference papers with number ersa10p658.

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Date of creation: Sep 2011
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Handle: RePEc:wiw:wiwrsa:ersa10p658

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  1. Skans, Oskar Nordstrom, 2005. "Age effects in Swedish local labor markets," Economics Letters, Elsevier, Elsevier, vol. 86(3), pages 419-426, March.
  2. Robert Shimer, 1999. "Why is the U.S. Unemployment Rate So Much Lower?," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 1998, volume 13, pages 11-74 National Bureau of Economic Research, Inc.
  3. Zimmermann, Klaus F, 1991. "Ageing and the Labor Market: Age Structure, Cohort Size and Unemployment," Journal of Population Economics, Springer, Springer, vol. 4(3), pages 177-200, August.
  4. Katz, L.F. & Murphy, K.M., 1991. "Changes in Relative Wages, 1963-1987: Supply and Demand Factors," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1580, Harvard - Institute of Economic Research.
  5. Diane J. Macunovich, 1999. "The fortunes of one's birth: Relative cohort size and the youth labor market in the United States," Journal of Population Economics, Springer, Springer, vol. 12(2), pages 215-272.
  6. Ulrich Thießen & Konstantin A. Kholodilin & Boriss Siliverstovs, 2008. "Does Aging Influence Sectoral Employment Shares?: Evidence from Panel Data," Discussion Papers of DIW Berlin, DIW Berlin, German Institute for Economic Research 785, DIW Berlin, German Institute for Economic Research.
  7. Kapoor, Mudit & Kelejian, Harry H. & Prucha, Ingmar R., 2007. "Panel data models with spatially correlated error components," Journal of Econometrics, Elsevier, Elsevier, vol. 140(1), pages 97-130, September.
  8. Margarita Sapozhnikov & Robert K. Triest, 2007. "Population aging, labor demand, and the structure of wages," Working Papers, Federal Reserve Bank of Boston 07-8, Federal Reserve Bank of Boston.
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