Europe’s demographic development and the impact on the workforce

Table of contents

1 Introduction

2 Europe’s demographic development and the decline of the workforce
2.1 The demographic development – overview of the main trends
2.1.1 Mortality
2.1.2 Fertility
2.1.3 The baby-boom generation
2.2 Ageing – changes in the labor force and the consequences
2.3 Policy options – How to face the challenge?
2.3.1 Promotion of higher fertility
2.3.2 Immigration
2.3.3 Higher productivity
2.3.4 Higher labor-force participation rate
2.3.4.1 Higher participation in the group of young workers
2.3.4.2 Higher participation of females
2.3.4.3 Higher participation of older workers

3 Conclusion

4 Bibliography

1 Introduction

Though EU commissar Špidla speaks, in 2006, about a “demographic time bomb” which needs to be disarmed¹, a study suggests that back in 2003 52 percent of the German population has not even heard about the term “demographic change.” Even if these figures are a bit outdated they show that discussion concerning this topic continues between experts and politicians and has been a long-time taking to reach the broader populace.² Nowadays, word has spread. The topic has become more pressing on political agendas, national and international summits. In the 2007 Adecco Fitness Survey, European companies invision the demographic change as the second biggest business challenge, following Globalization.³ The UN has been pressing the issue of ageing populations since the 1940s and forecasts that the number of people over 60 years old will have tripled by 2050. For the first time in history, this figure will exceed that of the number of children (0 – 14 years).⁴ However, these aggregated figures do not show that these developments have taken place differently across the globe. Europe is experiencing the most rapid ageing, and the number of old people is already higher than the number of young people. This may explain why demographic change now has such a high priority in EU policies.⁵ Nico van Nimwegen, deputy director of the Netherlands Interdisciplinary Demographic Institute notes that the ageing problem is the dominant challenge the EU is facing. He sees the implications of this trend and the need for action and policy change in various areas. Employment has been recognized as one of these target areas.⁶ The ageing of the population has important repercussions on the available labor force and thus impacts economic prospects as a whole.

This paper will analyze demographic changes and their impacts on the labor markets. It will begin with an overview of Europe’s demographic development and its driving forces. The subsequent impacts on the labor force will then be discussed followed by an overview of different proposed policy options and how they could help circumvent the consequences of demographic change. Here the goal shall not be to detail single policy measures, but to unveil areas in which policy action needs to be considered. Particular policies have to be chosen carefully by each country in accordance to its individual situation and institutional framework. Finally, the findings of this paper will be reviewed and a final conclusion will be given.

2 Europe’s demographic development and the decline of the workforce

2.1 The demographic development – overview of the main trends

Up until the most recent report from EUROSTAT on the European Union’s population development, there were seen two major challenges within the European Union: on the one hand, the ageing population and on the other, its’ decline of 16 million people by 2050. Now, with the new 2008 report, projections show a slight increase in the European population of 10 millions by 2060 instead. Consequently, evident is the difficulty to make long-term forecasts on demographic developments.⁷ Nevertheless, the EUROSTAT data is the best available and allows us to proceed with long-term policy planning. The following graph shows the forecasted change in the EU’s population size.

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Graph 1: Population projections for EU 27 Source: European Commission, 2008, P. 53

One can see that in the EUROSTAT baseline scenario, the population will increase from today’s 495 to almost 506 million people by 2060 due to immigration.⁸ However, even with the inflow of immigrants, the EU 27 population faces a steady decline from 2035 on.

Looking on the pure population size is not enough to predict demographic change within Europe. One must consider the population makeup. The following age pyramid and the preceding table of statistics devised by the European Commission illustrate how radically different the EU 27’s population composition in 2060 will be from today’s.

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Table 1: Convergence Scenario for population development in EU 27
Source: European Commission, 2008, P. 54

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Graph 2: Age pyramid for EU 27

Source: European Commission, 2008, P. 5

The number of young people (0-14) in the EU will decline by about 6.5 million or 8.5% by 2060. The number of working-age (15-64) people will drop by 49.96 million or 14.99%, whereas the number of seniors (65 and up) will increase by a staggering 66.87 million: +79.04%. The change in the EU’s median age also emphasizes the currently developing ageing problem. In the 1960s, this median age was 32 years. It has since increased to 38.5 years in 2005 and is predicted to reach 48 years of age by 2050.⁹ In the above table, one can also see that the old age dependency ratio will predictably more than double from 25.4 to 53.5. This means that the current ratio of older people to working age people of 1:4 will be around 1:2 in 2060. The determining factors for this demographic development are mainly fertility, mortality, cohort effects and immigration.¹⁰

2.1.1 Mortality

Since the 19th century, the increase in life expectancy’s main cause has been the decrease of infant mortality which has been due to socioeconomic and medical improvements over the years. Furthermore, more recently the mortality rates amongst middle-aged people have decreased. The mortality rates amongst seniors have also been greatly reduced throughout these decades. This has occurred because of furthering medical improvements but moreover due to a change of lifestyle including better nutrition and a healthier way of living.¹¹ Due to these medical and socioeconomic achievements, average life expectancy has increased in the past four decades by about 10 years. It had reached 75.2 years for men and 81.5 years for women in 2004.¹²

2.1.2 Fertility

Another important factor, contributing to these demographic developments (as seen above) is the changing total fertility rate. This TFR represents “the mean number of children that would be born living to a woman during her lifetime if she were to pass through her childbearing years conforming to the fertility rates by age of a given year.”¹³ The replacement rate for this indicator is 2.1. That means a society with a TFR of 2.1 would have a stable population, without the contributing factor of immigration.¹⁴ On average the TFR in Europe has been seen to decline from 2.6 children in 1965 to 1.5 in 1995. Since then, a slight increase has been observed. However, there are also huge differences in TFRs between member states of the EU; whereas in the EU 15 the TFR is around 1.6 children, in the NMS-10 it is only about 1.3.¹⁵ Hence, a lower fertility rate decreases the size of following cohorts in comparison to the older ones, which explains the decrease in the age groups between 0 and 65.

Relatively, there is some debate about whether the TFR truly displays the real fertility rate. It might be biased due to the so-called tempo-effect, occurring out from the statistical effect of birth postponements. It is considered that the real fertility rate is about 0.2 higher.¹⁶ Nevertheless, corrected for the tempo-effect, fertility still does not reach population replacement level.

2.1.3 The baby-boom generation

As one can see in the age pyramid, there is a big bulge. This illustrates the big birth cohorts of the baby-boom generations occurring between 1945 and 1965. Now, this portion of the populace still boosts the working age population but they will soon reach retirement ages and add to the older population group: the prominent population cohort which will have to be supported by the working age population. This consequence will eventually disappear, but only in later decades.¹⁷

2.2 Ageing – changes in the labor force and the consequences

From an economical point of view, a key aspect of ageing will soon be the impact on the size of the working age population, which is expected to decrease by nearly 50 million people up until 2060.¹⁸ It is expected that the total potential workforce will increase up until 2011 before beginning to decline.

[...]

¹ Cf. EurActive, 2006

² Cf. Kröhnert S., 2006

³ Cf. Adecco Institute, 2008, P. 8

⁴ Cf. United Nations, 2008, P. 1 - 5

⁵ Cf. United Nations, 2008, P. 18

⁶ Cf. Nimwegen N. van, 2006, P. 1f

⁷ Cf. European Commission, 2008, P. 7

⁸ Cf. European Commission, 2008, P. 7

⁹ Cf. World Bank, 2007, P. 5

¹⁰ Cf. Europäische Kommission, 2006, P. 5f

¹¹ Cf. Europäische Kommission, 2006, P. 5f

¹² Cf. European Commission, 2008, P. 34ff

¹³ Cf. European Commission, 2008, P. 28

¹⁴ Cf. European Commission, 2008, P. 28

¹⁵ Cf. European Commission, 2008 b, P. 19

¹⁶ Cf. European Commission, 2008 b, P. 20f

¹⁷ Cf. Europäische Kommission, 2006, P. 5

¹⁸ Cf. European Commission, 2008, P. 54