Cohort size and youth labour-market outcomes : the role of measurement error

Using data from 49 European regions covering 2005-2012, this paper finds that the estimated effect of cohort size on employment and unemployment outcomes is very sensitive to the age range of the sample. We argue that this is because the identification strategy commonly used in this literature is unable to eliminate the bias caused by measurement error in the cohort-size variable. The latter arises because large shares of the young choose to acquire education and consequently the size of an age group provides a poor measure of age-specific labour supply. In our view older age groups provide a more suitable sample to test the implications of cohort crowding since the former will have largely entered the labour market. Using a sample aged 25-29, which has relatively low rates of participation in education, we find robust evidence that an increase in cohort size increases employment and reduces unemployment.