Eastern EU members: tackling shrinking labour forces

0



The growth model of the eastern EU member states (Bulgaria, Croatia, the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Romania, Slovakia and Slovenia) will be heavily affected in the coming years by the region’s population trends. Some of these countries, such as Latvia and Bulgaria, are among the worst globally in terms of population decline. Declining populations in this region will drag on countries’ economic growth potential and will increasingly force governments to address labour shortages, through policies such as increases in pension ages and relaxation of immigration rules. Declining populations will place eastern EU member states at a stark disadvantage compared with other emerging markets and will be the single largest drag on long-term growth.

The main challenge: shrinking labour forces

A chart that compares the labour forces today and in 30 years' time in the eastern members of the EU. Labour forces will shrink in nearly every country by 2050.
  • Over the medium term (2023‑27) all countries, apart from the Czech Republic, will experience population decline in the range of 0.1% and 0.8% a year. The Czech Republic’s population will merely stagnate, owing to net positive migration. 
  • Although these declines are not dramatic in and of themselves, the ageing of these populations will also contribute to shrinking labour forces. We forecast that the old-age dependency ratio will increase to an average of 36.7% in 2030 for the east European countries for which we produce such forecasts, compared with 32.3% in 2022. In Slovakia, Slovenia and Poland the old-age dependency ratio will rise by over 6 percentage points.
  • The impact of shrinking labour forces will be uneven sectorally and geographically. The long-standing urbanisation trend will continue, leaving smaller provincial towns and villages extremely vulnerable to labour shortages, including for essential services, thereby preventing a faster narrowing of regional inequalities.
  • Labour-intensive agricultural sectors will be among the most affected by labour shortages, exacerbated by low wages. The impact on services and industry will be mixed, with some subsectors—such as retail, hospitality and education—experiencing labour shortages, while others—notably finance, technology and professional services, which are higher paid—seeing greater competition. Low levels of state and private-sector investment into research and development (R&D) will not only curb productivity-promoting technological advancements, but will also lead to shortages in science, technology, education and mathematics careers, as salaries remain lower than in western Europe. 

Countries have space to boost labour productivity through automation

Labour productivity growth will offset poor labour force trends
  • Productivity gains will be solid over the medium term on average, partly offsetting the impact of population declines. Strong foreign direct investment (FDI) flows, including as part of a broader geoeconomic realignment of supply chains, as well as consistent policies in moving production up the value chain, will support these productivity gains. Access to EU funds and advanced technology will also help. In 2030-50 productivity growth will slow but will remain firmly above 2% in the majority of these countries, largely owing to investment in FDI-driven automation and to a lesser extent human capital development. 
  • Out of these countries, the Czech Republic will remain among the best placed in the long term given both its current population projections and among the highest labour productivity growth in the region. This is due to high R&D expenditure compared with its east European peers, close integration with German supply chains and one of the highest FDI/GDP ratios in the region. Even so, most eastern EU member states compare unfavourably with other, mostly Asian, emerging economies, where productivity gains are also solid and population growth still positive.

Rising life expectancy will give governments the option to raise the pension age

A chart that compares remaining life expectancy after pension and retirement age projections of the OECD. Rising life expectancy paves the way for unexpected pension age rises.
  • The biggest drag on state budgets and overall economic activity will come from the large number of workers retiring in coming decades and the much smaller workforce available to support them. People over 65 constitute about a fifth of the population in the region on average and that share could rise to about a quarter by 2030. 
  • Most governments have already planned for gradual increases in the statutory retirement age. This will be a contentious issue, but rising life expectancy and improving working conditions are likely to make higher retirement ages more acceptable. Such measures will provide some relief to state finances but will not solve the region’s labour market woes: over the longer term, the number of people going into retirement will continue to exceed those entering the workforce. 

Migration will accelerate under the threat of stalling growth

A chart that shows a surge in residency permits granted to foreigners and positive net migration in many countries across the region.
  • Shrinking labour forces and ageing populations mean that the region will have to increasingly rely on immigration to compensate for labour shortages. Historically there has been major pushback against immigration in these countries, and the limited number of immigrants they received were more than offset by a large number of people leaving their homelands for western Europe and other developed countries.
  • However, there is an observable trend of increased immigration, and in some countries net migration turned positive either in the late 2010s or during the coronavirus pandemic. In addition, there has been a substantial increase in residency permits granted and an increasing reliance on seasonal workers from abroad. 
  • These trends will only intensify over the medium to long term. As governments try to balance negative public opinion about immigration, short-term and seasonal employment rules are likely to be relaxed, allowing employers to access additional labour from abroad but preventing these people from settling permanently. 
  • Regardless, more immigration in the region is inevitable if living standards are to be maintained, and we are likely to see a permanent shift towards net positive migration in the eastern EU member states, in line with most of their peers in western Europe.

The bottom line: eastern EU member states are facing serious demographic decline that will be challenging to address and will create serious impediments to long-term growth and the attractiveness of their business environments. Compared with west European counterparts, eastern EU members have a much more negative demographic outlook. Compared with other emerging markets they are lagging behind even further. Catch-up growth opportunities and strong FDI flows will continue to support economic expansion over the long term, but potential growth will remain constrained by these negative demographic trends.



Source link

Leave a Reply

Your email address will not be published. Required fields are marked *