Labor Market Adjustments to Population Decline: A Historical Macroeconomic Perspective, 1875-2019

"Advanced economies will face population decline in the years and decades to come, particularly among those of working age. Yet, there is little empirical evidence of corresponding labor market implications. Tackling this shortcoming from a historical macroeconomic point of view, we compile a new dataset for sixteen advanced economies, covering demographic and labor market variables on an annual basis from 1875 to 2019. Based on a dynamic, nonlinear econometric model, we identify structural population shocks by using lagged births as external instruments for working-age population inflows and outflows, and trace the economic effects conditionally on the demographic regime. Our results suggest regime-specific differences: First, population decline quickly passes through to the labor market, translating into swifter disinvestment and decline in employment, but the effects of population growth take time. Second, in times of population decline, labor force participation increases as a response to reduced labor supply. Likewise, initially swift disinvestment tendencies decelerate. Consequently, we find only incomplete capital adjustment. Third, despite a declining labor supply, we find neither a decrease in unemployment nor any significant changes in wages as indicators of shortage. Finally, while population decline tends to depress total factor productivity, as also suggested by the literature, our results indicate that negative effects for economic growth are mitigated by increases in participation and the capital-labor ratio." (Author's abstract, IAB-Doku) ((en))