Acceleration of ageing threatens potential growth in Europe
The ageing of Europe’s population will accelerate in the coming years. This will have an impact on potential GDP growth in Europe in two ways. First, the working-age population (20-64 years) is shrinking. As a result, there is a risk of a labour shortage that can only be compensated by workers working more hours over a longer period of their life. Second, ageing puts a brake on productivity growth, as people over 55 years of age who work longer are on average less productive. Offseting the impact of ageing on the growth potential is a major challenge for governments. Reforms are needed to strengthen labour supply both quantitatively and qualitatively.
Faces of an ageing population
The ageing of the population is a phenomenon that almost all developed countries are confronted with. Many still see it only as an increase in the number of older people (over-65) within the total population and draw conclusions about its impact on pension costs. However, ageing is multifaceted. Within the older population, the proportion of the very elderly will also increase considerably. Furthermore, the ageing of the population will also have consequences for the working-age population. The age category consisting of 20 to 64-year-olds is not only declining in relative terms compared to the over-65s, but is also under pressure in absolute numbers. This is due to the massive retirement of the baby-boomers, while a decline in fertility means that relatively few young people are entering the labour market.
According to Eurostat’s latest demographic forecasts, the decline in the number of 20-64-year-olds in Europe will accelerate in the coming years (see figure). In the euro area, the size of this cohort has already decreased by about 0.1% per year in recent years. This decline will accelerate to 0.6% per year by the end of the next decade. In the longer term, the expected decline of the working-age population in the euro area is greater than that in the EU as a whole.
The threat of insufficient labour may impact the growth potential of the European economy. Potential growth in the euro area is currently estimated at 1.3%, which is already significantly lower than the 1.8% rate registered ten years ago. Sufficient economic growth is important to ensure future prosperity. Indeed, the reduction in the working-age population means that, against the background of more retired people, there are fewer and fewer potentially active people who will have to bear higher pension and health care costs. At present, there are still three citizens of working age in the euro area for every person aged 65 and over. By 2040, there will only be two.
Lifting up labour participation
In order to maintain, or rather increase, employment levels, a further increase in the employment rate (the ratio of the employed to the working-age population) is required. In order to maintain the absolute number of people employed in the euro area at the 2019 level, the employment rate has to increase from 71.9% in 2018 to 75.0% in 2030. However, companies will need additional workers when engaging in new activities, which will require an even higher increase in the employment rate.
A further increase in the effective retirement age may help to increase labour supply. Apart from higher employment among older people, this also requires this group to remain sufficiently productive up to their (later) retirement. Although there are large differences between individuals, the literature points to a general decline in productivity as employees age because of diminishing physical and mental capacities. The increasing proportion of people over 55 in the working-age population, as the group continues to work longer, may thus slow down macroeconomic productivity growth. As a result, the ageing of the population may also have a negative impact on potential GDP growth via this channel.