Managing an ageing workforce: The impact of an ageing population on the German labour market

Table of contents

1. Introduction

2. The ageing population – European & German trend

3. The impact on the German workforce

4. Characteristics of an ageing workforce
4.1. Myths and stereotypes
4.2. Benefits to employers
4.3. Attitudes towards retirement

5. The German macro-economic environment
5.1. Public pension system
5.2. Employment protection
5.3. Non-wage labour cost
5.4. Level of education
5.5. Legislation on age discrimination
5.6. Further initiatives

6. New age management strategy
6.1. The need for change
6.2. Dimensions of good practice
6.2.1. Workforce planning
6.2.2. Development of an age neutral culture
6.2.3. Recruiting and selecting older workers
6.2.3.1. Expanding recruiting focus
6.2.3.2. Considering new recruiting channels
6.2.3.3. Adjusting selection procedures
6.2.4. Training and career development
6.2.4.1. Training opportunities for all ages
6.2.4.2. Cross-generational training
6.2.4.3. Adapting training programs to older workers
6.2.4.4. Providing management training
6.2.4.5. Rekindling mature careers
6.2.5. Alternative work arrangements
6.2.5.1. Phased retirement options
6.2.5.2. Flexible retirement deals
6.2.6. Occupational health and safety
6.2.6.1. Ergonomic considerations
6.2.6.2. Considering sensorial systems
6.2.6.3. Preventive health care and rehabilitation
6.3. Implementing new policies
6.3.1. Ensuring overall commitment
6.3.2. Involving all generations
6.3.3. Encouraging knowledge transfer
6.3.4. Conducting a situational approach

7. Conclusion

8. Literature

9. Appendices

List of abbreviations

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List of figures

Figure 1: Demographic Transition Model

Figure 2: Birth rate ranking

Figure 3: Old-age dependency ratio - Germany 1970-2050

Figure 4: Population pyramids - Germany 1950-2050

Figure 5: Population pyramid - Germany 2006

Figure 6: Historical and projected labour force growth in Germany

Figure 7: Expectations for work in retirement - Germany 2005

Figure 8: Confidence in comfortable retirement - Germany 2005

Figure 9: Adequacy of public pensions - Germany 2005

Figure 10: Confidence in government’s ability to provide health benefits

Figure 11: Labour force participation rate by single year of age

Figure 12: Educational composition of the labour force aged 50-64

Figure 13: Possible retirement trajectories

List of tables

Table 1: Labour force composition - Germany 2000-2050

Table 2: Planned vs. expected retirement age - Germany 2005

Abstract

Germany’s population, and consequently its workforce is ageing. Fewer young people will enter the workforce and employers will be pressed to draw from an expanding pool of older people. As a consequence the work- ing age population is projected to decline significantly; while the numbers of organisations depended on them will rise. At the same time, baby boomers are moving towards retirement and can not be replaced by mid- dle-aged or younger workers. Facing impending talent shortages and a substantial loss of knowledge and experience, companies might have little choice but to implement new employment strategies. Primarily based on secondary research and supported by available data from various re- search institutions, this paper considers relevant variables and ap- proaches related to challenges from a German perspective. This is done regardless of specific industry conditions and circumstances. The paper covers selected peripheral issues like attitudes and retirement intentions of older workers and the myths and stereotypes about them. It provides an overview of the German labour market, specifically the situation of older people, and how public policy has been responding to improve related conditions. Finally, minor and major interventions are presented to adapt human resource methods, work arrangements, and framework conditions. Recognising that an effective response to the demographic changes re- quires a broader perspective, i.e. considering all working generations, the proposed initiatives primarily focus on the attraction and retention of older people.

1. Introduction

Demographic change, more precisely a rapidly ageing workforce, is one of the major problems in Europe. Countries like Germany anticipate that the population will age substantially over the next few decades (Patrickson & Hartmann 1998; Robson 2001). By 2050, on current trends, half the Ger- man population will be aged over 48 and one third will be 60 or older (The Economist 2005). The ageing population results from a significant decline in the number of young people, and an increasing number of older people, who live a longer and healthier life (European Foundation for the Im- provement of Living and Working Conditions 2004c). In Germany, a higher life expectancy is accompanied with historically low birth rates, causing a natural decrease in its population (Kuné 2003). A subsequent reduction in the supply of labour and a change in its composition are likely impacts on the German workforce. The ageing of the German workforce is mainly in- fluenced by a particular generation - the baby boom generation i.e. people born between 1946 and 1964 (Donkin 2006b; Organisation for Economic Co-operation and Development 2005a). Being far larger in numbers than the generations that follow, baby boomers are moving towards retirement and unlikely to be replaced by middle-aged workers moving into their posi- tions or younger workers entering the workforce (Jadin 2006; Yoder 2002). The looming challenge stretches beyond the lack of bodies. Companies face losing significant numbers of their most experienced workers in re- tirement, including skills, training, and qualifications (Kiyonaga 2004; Tif- fany 2006). Talent shortages and a substantial loss of knowledge and ex- perience may be the result. Against this background, companies are fac- ing tight labour markets on the one hand and little choice but to employ more older workers on the other hand (Concours Group 2003). As future competitiveness is increasingly resting on the performance and productiv- ity of older people, their efficient retention and utilisation becomes crucial (Walker 1998). In view of this demographic urgency, this paper considers variables and suggestions on how to approach related challenges from a German perspective, regardless of specific industry conditions. It starts addressing stereotypes and assumptions about older workers and their likely value for an organisation. The paper furthermore concentrates on attitudes and intentions of German workers regarding the issue of working beyond the traditional retirement age. German labour market conditions, particularly the situation of older people, and public policy responses are looked into next. Considering the need for new employment strategies to offset the impending labour and skill shortages, the paper ultimately pre- sents a range of possible interventions for employing organisations in Germany. In conclusion the paper includes recommendations focusing on workforce planning, coping with internal age bias, recruiting and training of older workers, alternative employment deals, and adaptation of the work- place.

2. The ageing population - European & German trend

Over the next 50 years global demographic structures are projected to un- dergo major changes (Robson 2001). Demographic change, more pre- cisely a rapidly ageing population, is regarded as one of the biggest prob- lems in Western developed countries, especially in Europe. Since dec- ades, Europe has the highest proportion of population over 65 years old and, with the exception of Japan, the world’s 25 countries with the eldest population are all in Europe (Kuné 2003). European countries like Ger- many can anticipate that their population, and consequently workforce, will age substantially over the next few decades (Patrickson & Hartmann 1998). By 2050, on current trends, the largest segment in the European population will be 65- to 69-year olds. Half the population is expected to be over 50; and the segment of 65 and over will be as large as the under 15s (The Economist 2005).

The ageing population results from a sharp decrease in the number of young people, caused by the change from high birth rates (fertility) and death rates (mortality) to low birth and death rates (Wikipedia - The free encyclopedia 2006). This trend is labelled the term demographic transition. The underlying Demographic Transition Model by Warren Thompson de- scribes the population changes through 4 stages as depicted in Figure 1. Most developed countries are argued to be in stage four of the model, characterised by low birth rates and low death rates. The majority of de- veloping countries are expected to be in stage 2 (rapidly falling death rates) or stage 3 (falling birth rates), and no country is argued to currently be in stage 1 (high birth rates and death rates). Although the original model has just four stages, it is widely accepted that a fifth stage repre- sents a situation where there is a natural decrease in the population, as birth rates have fallen below the death rates. Countries like Germany and Italy could be argued to be entering this stage.

Figure 1: Demographic Transition Model

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Source: (Wikipedia - The free encyclopedia 2006)

One reason for this looming shift is simply that people are living longer (Kuné 2003). High-technology medical treatment and advances in health care have contributed most to the mortality reduction. Diseases and death are increasingly treated medically and a further rise in longevity can be expected as a result from continuing successful medical interventions. Trends towards better working conditions, and above all, towards a better life-style and health behaviour have further contributed to a higher life ex- pectancy and are expected to continue doing so in the next few decades.

Germany has experienced a rapid decline in mortality rates since 1975, which is expected to continue into the future. A further increase in life expectancy of around five years for men and women, will lead to a high growth in the number of people in the 80 years bracket, and subsequently, to a prolongation of the retirement phase (Organisation for Economic Cooperation and Development 2005b).

According to the 10th population projection by the Federal Statistical Office of Germany, half the German population will be aged over 48 and one third will be 60 or older in 2050 (Federal Statistical Office of Germany 2003a). The Organisation for Economic Co-operation and Development (2005) projects that by 2035, the share of the elderly aged 65 years and over is to increase from its current 18% to 30%.

The overall European population is expected to not only live longer, but also to decrease in size over the next 50 years (Kuné 2003). Whereas significant population growth is projected in Asian and African countries, moderate growth in Northern America, in contrast European countries are likely to decline primarily due the demographic transition. Germany is expected to be one of three societies (accompanied by Italy and Spain) suffering most from a significant decrease in population.

Although the reduction in mortality rates seems to be the most obvious reason for an ageing population, several studies argue that the major cause of the looming demographic shift is to be found at the beginning of the life course. According to Kuné (2003), the ageing population is primar- ily determined by the decline in the fertility rate (births per woman) or birth rate (births per citizen), additionally reinforced by the reduced mortality. In 2005, the German Federal Statistics Office reported the lowest birth rate (8.33 births per 1,000 population) in the European Union and the lowest total on record since 1946 (Spiegel Online 2006). Another study published in March 2006 by the Berlin Institute for Population and Development puts Germany at the bottom of the world’s birth rate ranking (Kroehnert, Medicus & Klingholz 2006). Figure 2 compares birth rates of selected de- veloped countries confirming the status of Germany.

Figure 2: Birth rate ranking

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Source: (Kroehnert, Medicus & Klingholz 2006)

The Federal Statistical Office of Germany assumes that current fertility rates will remain at this level during the next decades. In 2006, Germany has about 82,4 million inhabitants (Federal Statistical Office of Germany 2003a). Based on the assumed constant birth rate, the population is ex- pected to marginally increase to 83 million in the next few years but then to decline from 2013 to 75 million by the year 2050 - the population in 1963. This is expected to lead to a situation where the group of over 60s (28 million or 37% of the population) will be more than twice as large as the under 20s (12 million or 16% of the population). To keep the ageing index of the German population constant would require an increased fertil- ity rate of 3.8.

Kuné (2003) attributes the downward trend in European birth rates to changes in reproductive behaviour which were caused by the following:

The ageing population - European & German trend 7

-a shift away from traditional ‘family values’
- the growing number of women in the work force (meaning that those who chose to raise up children are faced with the opportunity costs of children)
-a well developed system of social security (making children dispen- sable as a form of extended family-based social insurance)

These determining factors of reproductive behaviour are expected to remain in the future and contribute to the fact that children in Germany are seen as so called Luxusgüter (luxury goods) (Kuné 2003).

According to the Demographic Transition Model, populations decline when deaths exceed births. Migration as a third factor can also contribute to the overall level of population change. Although current net migration rates in Germany (2.18 migrants per 1,000 population) offset the excess of deaths (10.55 deaths per 1,000 population) over births (8.33 births per 1,000 population) a positive net immigration (immigration exceeds emigration) is unlikely to compensate for the fall in fertility rates. In the long run immigrants would have to arrive constantly in unfeasibly significant numbers (Beatty & Visser 2005; The Economist 2005).

Changes in demographic structures can also be expressed in terms of median age or the old-age dependency ratios (Beatty & Visser 2005). The median age (also known as the middle age) is that age at which half the population is younger and half older; an index that summarizes the age distribution of a population. Whereas the old-age ratio illustrates the num- ber of people aged 65 and over (potentially retired), relative to the number of person at working age (currently between 20 and 65 years) and there- fore indicates the expected shifts in the age structure (Federal Statistical Office of Germany 2003a).

Given Germany’s current demographic structure and the recent projec- tions of fertility, mortality and migration rates, both the median age and the old-age ratio are expected to increase steeply by 2050 (Organisation for Economic Co-operation and Development 2005b). The median age is expected to climb from currently 42 to 47. The old-age ratio on the other hand is likely to increase from currently 26% to 55%, after experiencing a critical acceleration between 2020 and 2030 where the ratio is expected to rise twice as fast as in the previous decades, from 36% to 47% as shown in Figure 3 (Federal Statistical Office of Germany 2003a).

Figure 3: Old-age dependency ratio - Germany 1970-2050

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Source: (Federal Statistical Office of Germany 2003b)

To illustrate the previously described changes in Germany’s demographic structure the following population pyramids are used. Showing the distribution of population by age and sex, Figure 4 graphically displays the significant demographic shift between 1950 and 2050.

The ageing population - European & German trend 9

Figure 4: Population pyramids - Germany 1950-2050

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Source: (Berlin Institute for Population and Development 2006)

The demographic transition from high-fertility and high-mortality to lowfertility and low-mortality is illustrated by the shape changes from a pyramid like 1950 to a skyscraper like 2050. As shown the population structure in Germany not only has changed considerably in the past 56 years, but is expected to continue to change dramatically in future.

As the future course of fertility, life expectancy and migration is difficult to project over the long run, demographic projections like these are always uncertain (Kuné 2003). Nevertheless demographic trends over a period of up to 50 years can be seen as applicable. Unpredicted shifts in mortality and birth rates tend not to have a big impact upon the age structure of a population. It is more likely that the demographic challenge facing Ger- many may be even greater than these projections suggest as medical breakthroughs, for instance, are likely to further improve longevity in the future (The Economist 2004b).

3. The impact on the German workforce

The previously described demographic evolution leads to a concentration of the workforce towards the middle of the age pyramid (Marquié, Paumès Cau-Bareille & Volkoff 1998). By looking at the working ages (20-64 years), Figure 5 illustrates that the age structure of this cohort is mainly impacted by a particular generation - the baby boom generation - people born between 1946 and 1964. Subsequently, the ageing of this generation is strongly affecting the German workforce.

Figure 5: Population pyramid - Germany 2006

illustration not visible in this excerpt

Source: (Kroehnert, Medicus & Klingholz 2006)

The oldest baby boomers already turned 60 this year; the youngest mem- ber of the baby boom cohort will be 65 in 2029. This generation, currently determining a group of prime-age workers, might cause a dramatic change in the labour force over the 23-year period between 2006 and 2029 (Beatty & Visser 2005). By 2020 the baby boomers will be ages 56 to 74, representing a cohort which by then might have grown by 25% between 2010 and 2020. Finally, from 2020 to 2029, the baby boom workers may stand for the largest number of people ever retired in such a short time (Organisation for Economic Co-operation and Development 2005b).

This particular generation, far larger than the generation that follows, is moving towards retirement at a time of falling birth rates, increasing life expectancy, and a decline in workers starting to work (Donkin 2006b). The effect on certain occupations and industries could be substantial. In the coming three decades the labour force is expected to contract because the numbers of baby-boomers will not be replaced by middle-aged work- ers moving into their positions or by younger workers entering the work- force (Jadin 2006; Yoder 2002). If all baby boomers retire permanently from now on, the workforce in Germany will shrink dramatically (Watters 2006). Even if the mass exodus does not happen in the next year or two, companies are facing the potential loss of their workforce sometime in the near future (Kiyonaga 2004).

According to the Organisation for Economic Co-operation and Develop- ment (2005), the workforce segment over age 50 is likely to increase from 30% to almost 40% in Germany up to 2020. At the same time the number of workers aged between 20 and 29 is expected to decrease (overall a decline of 20% over the next decades is predicted within the European Union) (The Economist 2006). As a consequence, the total number of those of working age (20-64) in Germany is projected to decline from 50 to 40 million people by 2050. Figure 6 shows the impact of different scenarios on the labour force.

The constant scenario assumes that participation rates (ratio of the cur- rently employed population to the present population of age groups 20-64 years) by five-year age groups and gender remain constant at their 2000 levels (Organisation for Economic Co-operation and Development 2005b).

The maximum scenario assumes that participation rates converge by 2030 to the corresponding maximum rate observed across OECD member countries in 2000 and remain constant from then on. The national scenario is the most recent national projection conducted by Germany’s Institute for Employment Research (IAB); it assumes an increase in participation rates of older workers in response to recent pension reform (see section 5.1) and also a small increase for women aged 25 and over.

Assuming a constant participation rate, the total German labour force is projected to fall sharply to its 1950 level by 2050. Between 2020 and 2030, the decline would be as much as 300,000 to 400,000 people per year (Organisation for Economic Co-operation and Development 2005b).

Figure 6: Historical and projected labour force growth in Germany 1950-2050; Index (2000=100)

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Source: (Organisation for Economic Co-operation and Development 2005b)

The problem is not just the lack of bodies (Kiyonaga 2004; Tiffany 2006). In times where qualified workers will be harder to come by, companies might face huge numbers of their most experienced workers retiring, in- cluding their skills, training, and qualifications. The inability to recruit enough qualified workers is already threatening the performance of many corporations and entire industries are feeling the pressure of the demo- graphic shift (Rappaport, Bancroft & Okum 2003). While investment banks are not able to find enough financial analysts, telecommunications and aerospace companies cannot find enough trained engineers and pharma- ceutical companies not enough research chemists (Coleman 1998). Gen- erally it is not only a matter of costs but also time to replace such skills and abilities attributed to the time lag between the demand for skills and the ability of the educational system to provide them (Dychtwald, Erickson & Morison 2004). Consequently companies may face a severe shortage of talented workers in times where workers in general, in particular experi- enced, skilled workers, will be in short supply (Coleman 1998; Dychtwald, Erickson & Morison 2004). The most dramatic shortage of workers may hit the age group associated with leadership and key customer-facing posi- tions; baby boomers in managerial and executive positions (Dychtwald, Erickson & Morison 2004). A substantial loss of knowledge and experi- ence in this area may result from situations where occupational orienta- tions, associated life experience and relationships, necessary to keep companies thriving and heading toward success, are lost every time a baby boomer retires, while leaving insufficient talent to fill the vacancy (Jadin 2006; QLTP Consultants 2005). Especially in cases of specific and individualised knowledge of processes, procedures and the history of de- cision making in the organisation, the retirement of the baby boomers may adversely affect the operation of the entire company (Kiyonaga 2004).

The decline in overall population not only implies a reduction in the supply of labour but also a change in its composition. It is likely that in Germany labour services will increasingly be offered by older people (Organisation for Economic Co-operation and Development 2005b). Depending on the participation rates of older workers, the share of workers aged 50 and over might increase from 23% in 2000 to between 32% (assuming constant participation rates) and 39% (assuming maximum participation rates) by 2020. Thus the average age of the labour force is likely to increase by two to five years as shown in Table 1.

Table 1: Labour force composition - Germany 2000-2050

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Source: (Organisation for Economic Co-operation and Development 2005b)

The ageing workforce may possibly affect each company differently depending on the industry, the type of business, and the kind of workers it employs. While probably all firms may suffer from a labour shortage, a manufacturing company might primarily face increased health and disability costs associated with its blue-collar workers; the most pressing issue for firms in the services industries on the other hand is likely to be one of employee retention (Caudron 1997). Although these differences have been recognised the purpose of this paper is to give an overall perspective of the likely impact on the German industries.

The presented forecasts illustrate how important it will be for German companies to deal with the issue of an ageing labour force (Organisation for Economic Co-operation and Development 2005b). In the coming two to three decades, fewer young people will enter the workforce; the working age population is projected to decline, and employers must draw from the expanding pool of older people who are already past today’s normal re- tirement age (Robson 2001). The numbers of workers will not only decline, but the numbers of organisations dependent on them to meet staffing and performance needs will rise (Beatty & Visser 2005; The Economist 2004b). Making up the pool from which employers might meet their future staff, the importance of the over 60 group as potential employees will increase (Robson 2001).

4. Characteristics of an ageing workforce

To be able to counter the adverse effects of the demographic development, organisations should understand older workers, particularly those being part of the baby boom generation.

As already mentioned, this particular generation comprises the birth co- hort, beginning in 1946 and lasting through to the early 1960s (Ogg & Bonvalet 2006). Most important to employers should be answering the question: What defines the attributes of this generation (in Europe)? One common trait of the European baby boom generation is that most people grew up in relative poverty, during the post-war construction of European economies and societies (Ogg & Bonvalet 2006). They also have wit- nessed the legalisation of divorce and abortion, the arrival of the contra- ceptive pill, and the boom in consumerism. It is however relatively unclear to what characteristics, interests, and attitudes those experiences have contributed. Unlike the North Americans, Europeans have been more reti- cent to define particular attributes of the baby boom generation, although having long been aware of the implications of an ageing population. More- over, the issue of an ageing workforce is not restricted to the baby boom generation. In fact, and according to demographic forecasts, employers may have to deal with the impact of an ageing workforce over the next 3 to 5 decades. Therefore, this chapter aims to identify attributes of those being argued as older workers, today and in the future.

4.1. Myths and stereotypes

Arguments around the term older workers and the very concept of being old seems to be confusing (Patrickson & Hartmann 1998). Different per- ceptions of the age of an older worker exist. Some put it as low as 45; some thought that 55 is the benchmark; and others nominated 60 as the turning point (Dychtwald, Erickson & Morison 2004; Watters 2006).

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