Demographics and Unemployment
University of Iceland Institute of Economic Studies Working Paper No. W0109
35 Pages Posted: 1 Oct 2003
Date Written: January 2002
This paper introduces the age structure of the population into the analysis of medium term unemployment swings. We incorporate age-related features into the Shapiro-Stiglitz shirking model and find that the observed age pattern of unemployment can be explained in terms of the model. Moreover, we find that changes in the age composition of the population - in particular the ageing of the baby-boom generation - has caused OECD wide unemployment to be 50 basis points lower than what it currently is. The magnitude of his effect varies between countries though but it is never larger than 140 basis points (France and Italy). More importantly, the age effect on the labour participation rate is considerable - the rates would have fallen by almost 5 percent point more than observed in the OECD if the baby-boom generation had not come of age. There is also a statistical relationship between several macroeconomic shocks and demographic factors. In particular, the larger the share of working-age individuals, the higher is the ratio of investment to GDP, and the higher the share of the 25-34 year old cohort, the greater the rise in stock prices in recent years.
Keywords: Unemployment, age-stucture, G7
JEL Classification: J21, J11, J69, E24
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