Ageing population could impede growth in EU job market

A working paper analysing the impact of demographic ageing was issued by the European Commission on 11 September 2013. According to the findings, some of the economically strongest EU Member States will be confronted with serious employment growth constraints due to labour supply bottlenecks within the next five years. The working paper discusses a number of future policy options to address these problems, such as increasing working time, activating unused labour and encouraging mobility.

Main findings of the working paper

A European Commission working paper, ‘Growth potential of EU human resources and policy implications for future economic growth’, analyses the impact of demographic ageing. The findings indicate that demographic trends and, more specifically, the ageing of the EU’s population, represent a key challenge in their impact on the size and structure of the European workforce.

According to Eurostat data analysed in the paper, the EU’s working-age population (that is, those aged between 20 and 64) reached a peak of 304 million in 2012 and is now declining. At present, a working age person in one of the 27 Member States for which there are data has an average of 1.6 dependents and this is set to rise to almost two by 2060. By 2030, the working-age population in the EU is expected to have fallen by 13 million, or more than 4%.

The effects of the shrinking of the working-age population are expected to be felt particularly strongly in the more robust EU economies, such as Germany, Austria, the Netherlands and Finland, where serious labour supply shortages are expected by the end of this decade.

‘Skills squeeze’ predicted

These changes will have implications not only for the size of the EU’s workforce, but also its composition. The proportion of skilled workers among the retired is expected to increase over the coming decade, as the ‘baby boomers’ step down from work. At the same time, the ratio of new labour force entrants with tertiary education to each retiree is expected to decrease from 3.5 to 1.4. This means that there is likely to be a skills squeeze in the EU.

The working paper predicts serious bottlenecks in the supply of highly educated workers in the next few years and that ‘scarcity of labour, particularly of the highly skilled, has the potential to impede future economic growth’. This is expected to be the case even in countries such as Ireland, Cyprus and Spain, which have relatively higher levels of labour reserves, because the recent economic crisis has had less impact on highly skilled workers in these countries.

Policy implications

The working paper suggests a number of policy options to maximise employment growth.

  • The option of increasing working time is explored. However, there is no firm evidence to support the view that increasing working hours will increase productivity. In fact, in the case of older workers or those who depend on flexible working time, it may be counter-productive. It is also noted that, even if successful, increased working time is not a permanent source of growth.
  • Activation policies are important, particularly those targeting pools of unused labour such as women and older workers who, it notes, could make a substantial contribution to employment levels over the coming years.
  • Geographical mobility is highlighted as a key tool for stabilising employment levels. It is noted, however, that this:

…requires a thoroughly new policy approach at EU level, aiming both at making best use of the potential of migrants already living legally in the EU, while opening clear and stable pathways for new migrant workers on the basis of specific labour vacancies, but also on the basis of much broader human capital criteria.

Conclusions

In the long term, according to the working paper, productivity growth is the only possible source of sustainable economic development in the EU. Activation and employment policies will merely buy enough time to implement the necessary long-term reforms and investment needed to achieve this, probably before 2030.

The working paper concludes that:

…historically, Europe’s long tradition of high-quality workers has been one of its key economic assets. In the highly competitive globalised economy of tomorrow, it is of utmost importance that Europe retains this competitive edge by investing in the development of skills and education. Securing a continuous supply of highly skilled workers in the years ahead is a strategic priority for Europe. This is even more important since Europe will not be able to compete with the emerging economies on the global markets in a range of labour-intensive, low-productivity sectors for both demographic and economic reasons.

Andrea Broughton, Institute for Employment Studies

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