Do Smaller Labor Market Entry Cohorts Really Reduce German Unemployment?

• Activity Number: 628
• Type: Contributed
• Date/Time: Thursday, August 5, 2010 : 8:30 AM to 10:20 AM
• Sponsor: Business and Economic Statistics Section
• Author(s): Carsten Pohl*+ and Alfred Garloff and Norbert Schanne
• Companies: Institute for Employment Research and Institute for Employment Research and Institute for Employment Research
• Keywords: Demographic change ; Cohort size ; Labor market

Abstract

We study the effect of smaller labor market entry cohorts on (un)employment in West Germany. Theoretically, decreasing cohort size may reduce unemployment due to "inverse cohort crowding" or increase it if firms reduce jobs disproportionately. The actual effect of cohort shrinking is an empirical question. In our study we use regional population and (un)employment data from 1978 to 2008. We account for spatial autocorrelation across Western German regions, and for endogeneity of cohort size due to migration of the (young) workforce using lagged births as instruments. Our analysis provides ambiguous news for the German labor market: small entry cohorts are indeed likely to decrease overall unemployment and thus to improve the situation of job seekers. With regard to the employment rate our preferred model suggests that employment is not affected by a decrease in the youth share.