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The effects of cohort size on European earnings

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Abstract

I use the cross-country and time variation in the demographic structure of 11 European countries to study how changes in cohort size affect real earnings in Europe. I find that cohort size has a negative and statistically significant effect on earnings, and that this effect is larger for the older age group—aged between 35 and 54—than for the younger group—aged 20 to 34. I also find that earnings are more sensible to changes in cohort size in Southern Europe, which points to a lower degree of substitutability between individuals with the same education but different age. I argue that the uncovered lower substitutability in the Olive Belt of Europe is in line with the higher employment protection that its workers enjoy, at least compared to the workers located in Northern Europe.

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Notes

  1. See Bertola et al. (2002). Differences in flexibility are associated to different institutional setups, which affect wage determination and employment adjustment.

  2. See also Jimeno and Palenzuela (2002) and Shimer (2001).

  3. In the empirical section, I also experiment with alternative specifications of the weights, with no relevant qualitative changes in the results.

  4. My sample includes Germany, Denmark, Belgium, the UK, Ireland, Italy, Greece, Spain, Portugal, Austria, and Finland.

  5. I refer the reader to the discussion in Wright (1991), for more details.

  6. In order to compute cohort size for the 31 age groups, I use data on individuals aged 18 to 52.

  7. The units in the vertical axis of Figs. 2, 3, and 4 are percentage points.

  8. AGE takes the value 0 for age 20, 1 for age 21 and 30 for age 50.

  9. See Katz and Murphy (1992). The index measures relative changes in employment growth across industries.

  10. The measure of relative demand shifts developed by Katz and Murphy (1992), has been extensively used in the literature on skill-biased technical change.

  11. The F-test for the inclusion of the log of overall cohort size in the first stage regression of log cohort size on all exogenous variables is always well above 10. Results are available from the author upon request.

  12. These results are qualitatively robust to changes in the definition of cohort size which extends the number of adjacent ages to three and adapts the inverse V weights consequently (see Table 7 in the Appendix). They are also robust to changes in the definition of the sample, which excludes both part-timers and public sector employees (see Table 6 in the Appendix).

  13. Notice however that the difference between the estimated coefficients (0.175 and 0.070) is not statistically significant, as the 5% confidence intervals partially overlap.

  14. The assumption that the parameters in the CES sub-aggregates depends on regulation is not new. Blanchard and Giavazzi (2003), use a similar idea to model the effects of product market deregulation on wages and employment.

  15. When evaluated at the sample average, EP is equal to 1.

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Acknowledgements

This is a substantial revision of the paper entitled “Are Wages in Southern Europe more Flexible? The Effects of Cohort Size on European Earnings”, written joint with Charlotte Lauer, and produced within the TSER EDWIN Project, funded by the European Commission. I am grateful to Christian Dustmann, three anonymous referees, Charlotte Lauer, Thomas Zwick, and to the audiences at the EDWIN meetings in Milan and Mannheim for comments and suggestions. The European Community Household Panel data used in this paper are from the December 2003 release (contract 14/99 with the Department of Economics, University of Padova). The usual disclaimer applies.

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  1. Department of Economics, University of Padova, via del Santo 33, 35100, Padova, Italy

    Giorgio Brunello

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  1. Giorgio Brunello
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Correspondence to Giorgio Brunello.

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Responsible editor: Christian Dustmann

Appendix

Appendix

Table 6 Estimated effect of cohort size on log earnings
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Table 7 Estimated effect of cohort size on log earnings
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Brunello, G. The effects of cohort size on European earnings. J Popul Econ 23, 273–290 (2010). https://doi.org/10.1007/s00148-009-0250-y

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