Demographic and education effects on unemployment in Europe

We analyse the effects of demographic and education changes on unemployment rates in Europe. Using a panel of European countries for the 1975–2002 period - disaggregated by cohort and education - we empirically test the economic effects of the “baby bust” and the “education boom”. We find that structural shifts in the population age structure play an important role and that a significant share of variation in unemployment rates is also attributable to educational changes, the latter being usually neglected in aggregate studies. Results show that demographic and education shocks are qualitatively different for young (adult) workers as well as for more (less) educated people. Changes in the population age structure are positively related to the unemployment rate of young workers, while have no effect on adults. Conversely, changes in the education structure show a negative effect on the unemployment of the more educated. Labour market institutions also influence unemployment rates in different ways. Employment protection for regular workers increases unemployment rates, while temporary employment provisions reduce it. Unemployment benefits are found to have a displacement effect on unemployment, while corporatism of wage bargaining improves employment performance.