Age Structure and the UK Unemployment Rate

Abstract

The proportion of youths in the labor force has fallen dramatically over the past 15 years, following the collapse in the fertility rate in the 1970s ("the baby bust"). Given that youths always have higher unemployment rates than adults, this shift in the composition of the labor force towards those with lower unemployment rates may have been responsible for a fall in the aggregate unemployment rate. Using data from the Labour Force Survey, it is estimated that about 55 basis points of the 565 basis point fall in the UK unemployment rate between 1984 and 1998 can be accounted for by changes in the age structure of the labor force. Changes in the fraction of each age group that is economically active will also affect the composition of the labor force (and therefore potentially the unemployment rate); however, even controlling for changing labor force participation rates by age, demographically driven shifts in the age composition of the labor force still explain about 40 basis points of the fall in the unemployment rate. Finally, it is estimated that demographic change will have a negligible impact on the unemployment rate over the next decade, on the basis of recent labor force projections.