Aging and unemployment discussed in Vilnius
Every year the Lithuanian Conference on Economic Research attracts researchers in the country and abroad to exchange ideas, early stage research and collaborate on new ideas. Lithuanians from all over the world come, but also nationals of all countries affiliated, associated or friendly with Lithuania -- come to join. This year we presented our work on demographics and unemployment. A well-documented empirical regularity shows that that young workers are characterized by a relatively higher unemployment rate than prime-age workers. It is due to both entry frictions and the relatively lower productivity of inexperienced workers. Demographic transition due to low fertility rates implies that workers – especially young – are becoming increasingly scarce. These observations give rise to a hypothesis that demographic transition may reduce unemployment in the long run. Two mechanisms stand behind this hypothesis. First, composition effects imply that a high-unemployment group – the youth – gradually has a lower share in the total working-age population. Second, given worker scarcity, the value of young workers may increase. In a general equilibrium model, firms will adjust to the demographic transition by adjusting the number of job openings, which will counteract the direct effects of demographic transition. We study these mechanics in a model calibrated to replicate the features of the Euro area economy.