# **1 Introduction**

The relationship between cohort size and youth employment outcomes is of great interest in developing countries. In countries where cohort size is rising rapidly, better understanding this relationship can help policy-makers anticipate, and potentially address, the types of challenges that members of large cohorts may face when entering the labor market.<sup>4</sup> On the other hand, countries in which population growth has begun to fall are hoping to follow in the footsteps of the East Asian tigers, in which a demographic dividend due to declining dependency ratios helped contribute to rapid and sustained economic growth.<sup>5</sup> This raises the question of whether and how much declining population growth in these countries contributed to this boom by spurring the movement of workers into more productive employment opportunities.

In this paper, we estimate the correlation between changes in the size of birth cohorts and changes in employment outcomes for workers at different ages, using a newly compiled dataset of 83 lower and middle income countries.<sup>6</sup> There is no clear theoretical guidance as to how changes in cohort sizes should affect the labor market outcomes of workers. In neoclassical growth models, for example, the effect of changes in population growth depends on whether the saving rate is assumed to be endogenous or exogenous. In the Solow growth model, which assumes an exogenous savings rate, a rise in population growth leads to a fall in capital per worker and presumably worse employment outcomes. In contrast, in the Ramsey model, the savings rate adjusts in response to changes in population growth, and higher population growth leaves capital per worker unchanged.

Standard labor supply and demand models take a different perspective, and predict that increases in cohort size will negatively affect workers in the short term. Increasing the pool of workers, all else equal, shifts the supply curve to the right and therefore reduces equilibrium wages. Furthermore, if labor market frictions, efficiency wages, or well-enforced regulations prevent real wages from falling, larger cohort sizes could lead to increased unemployment.

> 4 Youth employment is also an issue in many developed countries, as young people are more likely to work in the informal sector or to be unemployed. See, for instance, O’Higgins (2001), DeFreitas (2008) or Coenjaerts, Ernst, Fortuny, Rei, and Pilgrim (2009) for global overviews, O’Higgins (2012) for a recent study of youth labor markets in the European Union, O’Higgins (2004) for Europe and Central Asia, Caroleo and Pastore (2003) for Spain, Sweden and Germany, and Perugini and Signorelli (2010) for different European regions.

> 5 Young (1995) for example argues that factor accumulation, e.g.  labor, played an important role in the East Asian miracle. The term “demographic dividend” refers to the potential for countries that are undergoing the demographic transition to benefit from a favorable population age structure. As countries develop economically, reductions in fertility and mortality create a boom generation that is larger than the generations preceding and following it, raising the potential impact of pro-growth as this generation matures (Bloom, Canning, and Sevilla, 2003)

> 6 The recent expansion of the International Income Distribution Database harmonized by the World Bank makes this study feasible.

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