Shrinking European Working Age Population: Immigration Matters

The population in many areas of the world including Europe, Japan and China is ageing at a steady rate because of declining birth rates and people living longer. In fact, the post war baby boom generation are reaching retirement age and leaving behind them younger and working age generations that are smaller.

Impact of shrinking workforce

It is particularly concerning for Europe that its defined working age population of 16 to 64 years as a proportion of the total population is shrinking and is threatening to adversely impact the longer-term economic outlook. In truth, the working age population as a share of the population in the EU has fallen from 66.3 per cent in 2013 to 63.6 per cent in 2023. And by 2050 the level of the working age population in the EU is projected to decline by 20% on the assumptions of net zero immigration and continuation of current labor market policies according to a report prepared by Allianz Research[1].

The major impact of such demographic changes in Europe will cause a decline in labor supply and in turn a fall in GDP over the longer term. And Charles Goodhart and Manoj Pradhan in their book entitled “The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival” argue that with the population of elderly persons, that are mainly consumers, increasing relative to that of the working age population, who are the prime producers, the rate of inflation will tend to increase and keep interest rates high. And with the working age population in decline, the resultant fall in the labor supply required for production would boost wages relative to profits.

Furthermore, it is contended that the ongoing and prospective shortage of labor, especially of skilled workers, will hinder already feeble productivity growth in Europe.

Another festering problem is that an ageing population places pressures on a country’s public finances, as it is the working age population that provide the bulk of tax revenues including contributions to national health schemes, while the mounting elderly population by living longer become an increasing drain on government resources with the higher payment of pensions and health benefits.

To paraphrase Dubriavka Suica, Vice President of the European Commission for Democracy and Demography, it can be stated “if the aforementioned demographic trends are not mitigated the EU will end up sleepwalking into dark scenarios, including looming threats to our competitiveness, pressure on budgets, strain on public services, and the potential for jobs across every sector of the economy to go unfilled”.

Solutions for a shrinking workforce

Goodhart and Pradhan argue that the best way to offset the adverse macroeconomic effects of a declining labor supply is to boost labor productivity growth. In fact, they cite the Japanese experience in which the higher productivity growth of Japanese corporations helped offset the damaging economic consequences of a rapidly ageing and shrinking working age population. In fact, GDP per capita in Japan rose moderately over recent decades and inflation was contained.

In order to raise weak productivity growth in Europe many experts recommend that governments invest in skills and education. In fact, the EU has tried to address the issue with initiatives such as the “European Year of Skills”, helping people to acquire the right skills and companies to fill skill shortages. And surely companies and public institutions should make productivity gains from automation and use of artificial intelligence, especially if there are the vocational education and training facilities to assist new workers and older persons pursuing new careers.

 Furthermore, there would seem to be scope for increasing labor force participation and productivity in Europe through the greater employment and utilization of the knowledge and experience of the rising number of elderly persons, many of which have been subject to obligatory “early” retirement or have been laid off because they have become “too expensive to pay”. In truth, a brain drain is created by retiring people too early. In this connection Andrew Scott in his book on “The Longevity Imperative”, states that “we must not shuffle a huge proportion of our society into unproductive and unhealthy old age”[2]. In meeting this challenge governments, private employers, and communities need to provide the facilities and opportunities including removing mandatory retirement ages to enable the elderly to be as productive and healthy as possible in their later years.   

However, it is contended by Allianz Research that substantially increasing labor force participation and raising productivity growth in EU countries will be far from sufficient in countering the large projected falls in their workforces. Their report in turn argues that the import of workers from outside Europe can be the most important factor in contributing to mitigating the looming demographic crisis in Europe. Indeed, the report estimates that without a substantial amount of net migration and the effective integration of migrants, especially of females, into the workforce, all countries in the EU could experience from 2023 to 2050 sizable falls in their working age populations ranging from 5% in Ireland to over 30% in Italy.

But, immigration has become a politically-charged issue with discussion ahead of the European parliamentary election being hijacked by populists, nationalists and “great replacement theorists”, with the latter claiming that “liberal elites” are promoting non-white immigration from outside Europe to undermine ethnic and cultural homogeneity. In response Dubriavka Suica has said that she “can understand why some people want to go far right, because they think that migrants will spoil their nation’s identity,” but at the same time she states that “we cannot live without migrants”.

Cyprus

Population in the Republic of Cyprus is ageing because of a falling birth rate and its residents living longer. This has resulted in persons of working age declining as a proportion of the total population from 70.4% in 2013 to 67.3% in 2023 despite considerable net migration. What is striking is that the report by Allianz Research estimate that in the absence of a net inflow of migrants and a continuation of current labor market policies, the working age population of Cyprus would decline by over 17% by 2050. In contrast, according to another scenario where they assume a large net inflow of migrants integrated effectively into the workforce, greater labor force participation, and higher productivity growth, it is estimated that the working age population would fall by just 3 per cent by 2050.

However, given present government policies in Cyprus the scope for raising labor force participation and productivity would seem to be limited as the employment rate at around 79 % for the working age population is high by EU standards and many of the elderly already engage in part or full-time work after mandatory retirement. In addition, with Cyprus increasingly channeling resources to the labor-intensive retail, hospitality/tourist and government sectors as well as into property development, the potential for raising productivity growth would appear to be small.

Furthermore, unless Cyprus can reorganize and reform its economy by expanding higher value-added sectors like health, and education and research, as well as effecting the promised green and digital transitions with advanced technologies that in turn provide decent job opportunities for skilled persons low productivity growth is likely to prevail and the brain drain from Cyprus will continue. Moreover, it appears that as in most other European countries Cyprus will need large inflows of imported workers to substantially reduce the shrinkage of its working age population so as to improve significantly the chances of achieving a better economic situation over the longer-term.

But, even if such immigration is controlled into Cyprus it would need to be accompanied by a substantial reallocation of resources to high value-added activities. Otherwise, wages in Cyprus would be suppressed with employers just controlling the inflow of cheap migrant labor into the retail, hospitality/tourist and construction sectors of Cyprus that would require an abundance of lowly-skilled workers.

However, unfortunately, with the shift in power in Europe toward nationalist and populist political parties united by more anti-immigration and anti-green stances, as demonstrated by the results of the recent European parliamentary election, the prospects for dealing with major and longer-term economic issues such as a declining labor force in Europe as well as climate change are becoming increasingly grim.