Unemployment decline in East Germany: the role of demography

This paper deals with the relation between population aging and the decline of unemployment in East Germany. For the analysis I adapt a direct and an indirect approach covering the years from 1996 to 2014. The direct approach quantifies the extent to which changes in the unemployment rate can be attributed to changes in the composition of the labor force. It includes a decomposition of the East German unemployment rate into changes in the workforce's age structure, labor market participation, and age-specific unemployment rates. The indirect approach centers on the effects of changing cohort sizes on the unemployment rate and involves spatial panel regressions on the small-scale regional level. Results of the direct approach show that changes in the age structure of the workforce exert only a minor impact on the unemployment rate, whereas results of the indirect approach attest aging a significant impact on unemployment. Evidently, demographic change seems to affect unemployment primarily through a general increase of competition for labor that is further fostered by feedback effects between regions than through a direct change of the age structure. I conclude that the declining unemployment rate in East Germany is indeed affected by aging as evidenced by a declining youth share and an increasing old-age share. This indicates that a reversed cohort crowding effect has taken place.