Employment and Social Developments in Europe (ESDE) 2023

4. Impact of population ageing and labour force participation on labour shortages

Several factors can limit labour supply over long periods of time. Demographic trends such as population ageing can reduce the size of the labour force, due to both an overall decline in the share of the working-age population and lower labour market participation rates among older people of working age. Structural issues limiting labour market participation of women can lead to substantial reductions in overall labour market participation rates. Low capacity to attract and integrate foreign workers into the labour market can also limit workforce size. These factors need to be considered jointly in order to understand their overall implications for the workforce and for labour shortages.

4.1. Population ageing

Given the projected demographic trends, maintaining and increasing labour supply will remain a major policy challenge. According to Eurostat’s EUROPOP2023 baseline population projection (Chart 2.11), the number of people in working age (blue line) is expected to decrease in the coming decades. While the working-age population (20-64-year-olds) reached a record of 272 million people in 2009, it declined to 265 million by 2022 and is expected to fall further, to 258 million by 2030, 247 million by 2040, and 236 million by 2050. Assuming that the activity rates of people in various education groups (primary, secondary and tertiary educated) within each population subgroup (young, prime-age individuals, older people, female, male, mothers) remain constant, ⁽²⁰²⁾ the number of active people is expected to follow a very similar pattern. After rising from 191 million in 2002 to a record 205 million in 2022, the number of active people is estimated to decline to 201 million in 2030, 192 million in 2040, and 184 million in 2050.

These projected activity rates will bring additional workers into the labour market. In a scenario where the activity of women in the EU converged to the target value in the three top-performing Member States for this group (Chart 2.11; see the difference between the target activity and the projected number of active women in labour market in Table 2.6 in section 4.2.), an additional 17.3 million women would enter the EU labour market. Under the same assumption for men, an additional 8.8 million men would join the EU workforce.

The challenges associated with a decreasing and ageing population vary significantly by country. The implications of these projected demographic changes are assessed using the European Commission’s Labour Market Model (LMM). The impact of the projected demographic changes to 2030 and 2050 on the main national economic and labour market indicators were simulated for 11 Member States (Germany, Italy, Austria, Poland, Belgium, Czechia, Spain, Finland, France, the Netherlands and Slovakia), using Eurostat’s baseline projections by age. Those figures were then compared with 2022 figures. The share of low-educated, middle-educated and highly educated people was assumed to remain unchanged for each age group. ⁽²⁰³⁾ In other words, the simulations do not take into account possible changes in education during the forecast period. ⁽²⁰⁴⁾

The population is projected to continue increasing in the next decade in the majority of the 11 Member States simulated (Table 2.5). It is expected to decrease slightly in Italy and Poland by 2030. By 2050, 4 of the 11 countries will face decreasing populations compared to 2022, with Poland experiencing the largest drop (-8%). Population ageing is a major challenge for all 11 Member States: the share of the older population (aged 70+) is expected to increase gradually in all countries in the short term (by 2030), then more sharply in the longer term (by 2050).

Population decline and ageing will cause GDP to decline in the Member States to varying degrees (Table 2.5). By 2030, Belgium and Finland are projected to be the only countries benefiting from demographic changes, with GDP increases of 0.3% and 0.7%, respectively. In the other countries, demographic trends are expected to exert a negative effect on GDP, ranging from 0.2% (the Netherlands) to 9.1% (Poland). By 2050, however, the vast majority of these countries will be negatively affected by demographic changes. The projected GDP loss associated with demographic trends varies between 3.3% (Finland) and 24% (Poland). Over this period, demographic changes are expected to exert a positive impact on GDP only in Belgium (+2.6%) and the Netherlands (+0.7%). In six countries, GDP loss will be more significant than the decline in the population, due to the increase in the old-age dependency ratio. As a result, the GDP per capita (15-69-year-olds) will deteriorate in these countries: by 2050, it is expected to decline by between 1.4% (Italy) and 7.6% (Poland). On the other hand, the demographic trends in Belgium, Finland, France, and the Netherlands are expected to positively impact their GDP per capita by 2050, with Finland experiencing the largest increase (1.4%).

Both production factors ‒ capital and labour ‒ are affected by the expected demographic trends. The impact on the aggregate participation and employment rates results from two opposing effects: firstly, the increase in the old-age dependency ratio negatively impacts the average activity and employment rates; and secondly, the decreasing proportion of young people of school age partly counterbalances the negative effect of the increasing share of older people. As a result, by 2050, both the active population (15-69-year-olds working or actively seeking employment) and the number of employed people are expected to shrink in all countries except Belgium and the Netherlands. Poland is expected to see the largest employment drop, both in absolute numbers (-3.6 million people) and as a percentage (-21.7%). Overall, in these 11 countries, the active population is expected to decrease by about 12.7 million, and the number of employed people by 11.6 million.

The decreasing working-age population, together with constant consumption patterns by an increasing older population, are likely to drive up labour shortages as long as the population age structure continues to shift towards older ages. This is the case because retired people continue to consume, maintaining the demand at a relatively high level, while supply decreases due to the shrinking of the working-age population. The impact of population ageing on labour shortages is even stronger when fiscal policy is expansionary. ⁽²⁰⁵⁾