The effects of cohort size in the longer term, however, are unclear, and depend partly on how the labor market impacts of cohort size translate into household investments in education. If the substitution effect dominates, a decline in equilibrium wages would lead young adults to stay in school longer by lowering the opportunity cost of education. This increased investment in education could in turn have a positive longer term effect on employment outcomes. On the other hand, reduced wages may squeeze poor households’ budgets to the point that they are unable to continue their children’s schooling.

Our paper relates to two strands of the literature. The first consists of several studies that have investigated how cohort size relates to labor market outcomes in developed countries. Welch (1979) examines how increased cohort size due to the post-war baby boom affected the earnings of American workers. The results indicate that larger cohorts earn less, and that most of the effect comes early in their career. Other studies, such as Brunello (2010), Morin (2011), and Wright (1991), also find evidence that larger cohort size can depress earnings for several years. Korenman and Neumark (2000), using a dataset of 15 advanced economies from 1970-1994, find that a larger youth population increases youth unemployment.<sup>7</sup> Shimer (2001), on the other hand, examines cohort size effects across US states and finds that youth unemployment falls as cohort size increases. He argues that companies moved to those areas with bigger youth cohorts, because there is a larger pool of well-educated graduates available to hire.

This paper is the first, to our knowledge, to extend this literature by investigating similar questions in developing countries. The labor-market context in developing countries differs from that in more advanced countries in several ways. Labor markets in developing countries tend to be characterized by a large pool of unskilled workers, who tend to work in subsistence jobs in agriculture or petty sales. A significant number of youth enter the labor market early, typically in self-employed jobs or helping out in family businesses. Social safety nets are often unavailable to cushion the effect of unemployment. At the same time, labor market regulations are typically either less restrictive or poorly enforced, which may lead labor market conditions to adjust more rapidly to changes in cohort size.

This work also relates to another strand of the literature that examines the long run impacts of labor market shocks. For instance, Kahn (2010) and Oreopoulos, von Wachter, and Heisz (2012) find a persistent impact on careers and earnings when graduates enter the labor market in a recession. One reason, according to Liu, Salvanes, and Sorensen (2012), could be the persistent effects of an early skill mismatch in the career. Chi, Freeman, and Li (2012), however, find that Chinese workers that entered the labor market during a recession caught up within three to four years. Our analysis sheds light on whether correlations between cohort size and employment outcomes for youth persist into adulthood in developing countries.

> 7 Rodriguez-Palenzuela and Jimeno-Serrano (2002) find a similar result for OECD countries.

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