The impacts of the main demographic trends, i.e. declining fertility, decreasing mortality and immigration, on the labour market are analysed by reviewing the existing literature. Changes in labour supply as well as the impact on non-wage labour cost, labour productivity and demand structures have to be taken into account. The study focuses on the evolution of the German economy in the next decades.
Survey of existing literature with a focus on empirical studies and simulations.
The demographic projections for Germany show two major tendencies with respect to the evolution of the working age population. First, labour supply will decrease due to low fertility rates in the past. Second, the share of older individuals in the work force will rise. While the timing of these processes depends on the specification of the demographic model, neither immigration nor changes in participation rates can off-set these main trends.
The declining labour supply is not expected to cause shortages on the labour market during the next decade. The accelerated decline in the working age population after 2010 may, however, contribute to substantial scarcities in some segments of the labour market.
In general, there is no correlation between labour supply and the rate of unemployment. The impact of changes in labour supply on unemployment mainly depends on the flexibility of wages. Empirical analyses of short-term effects do not point in an unambiguous direction. A demographic shock can cause a transitory increase in unemployment if it takes the form of an unexpected wave of immigration. Workers who compete with the immigrants often suffer from higher unemployment, while unemployment rates in other sectors of the economy may decrease.
Ageing of a constant total labour force implies that the share of workers who are approaching retirement increases while the fraction of young workers falls. Both groups are characterised by low employment rates and – in an international perspective – high unemployment. The level of unemployment among old workers is influenced to a substantial extent by retirement legislation and eligibility rules for unemployment benefits. Nevertheless, longer average unemployment spells for older people who are unemployed seem inevitable. It is suspected that the higher number of older unemployed persons in the future will not be offset by a reduction in youth unemployment.
An increase in the burden of the active population due to demographic trends will occur as a consequence of low fertility levels and the ongoing process of declining mortality. These factors will increase the contribution rates for public pensions, health insurance and long-term care insurance. Should the cost of labour be unaffected by the increasing burden, a falling labour supply due to the reduction of net wages is to be expected. In contrast, if the total labour cost increases, firms will react by reducing employment.
The hypothesis that ageing leads to lower productivity growth has not been confirmed in empirical research. It is quite difficult to measure age-specific productivity levels. Among other things, the practice to compensate employees according to seniority contradicts the use of wages as indicators of productivity. The life-cycle pattern of productivity is generally hypothesized to be of a parabolic type. Young individuals increase their productivity until it reaches a peak at middle age and declines thereafter. Hence, a productivity decline in the German economy may occur at later stages of the ageing process.
On the other hand, human resource managers in firms do not show a strong preference for younger workers in divisions that are related to innovative activities. This observation challenges the view that innovation capabilities become weaker with rising age. The policy to reduce the average age among its staff, which is often seen in large firms, can be attributed to the goal of increasing productivity by reducing the number of workers rather than to a selective personnel strategy.
If population ageing is caused by lower fertility, the economy will presumably show a lower savings rate. This is mainly caused by lower net incomes of workers who will face a higher contribution rate in the pension system. In addition the increasing capital-labour ratio in production may imply lower interest rates and, therefore, lower incentives to save.
The evolution of the structure of consumption in an ageing population is in many respects unpredictable. However, since the demand for health services and long-term care increases with age, the health care sector is expected to grow in relative size in the future.
H. Hofmann and V. Meier (2001), Beschäftigungseffekte und demographische Entwicklung (final report), Mimeo, München: Ifo Institute.
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