Growth Potential of EU Human Resources _2013 Final_rev2

8/21/2019 Growth Potential of EU Human Resources _2013 Final_rev2

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Growth potential of EU humanresources and

policy implications for futureeconomic growth

Working Paper 3/2013Jörg Peschner &

Constantinos Fotakis


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Social EuropeGrowth potential of EU human resources

September 2013 I 2

Europe is confronted with important socio-economic challenges due to demographic ageing and the declineof the working-age population. Their impact on the size and structure of the European workforce representsone of the key challenges in this context. The paper focuses on what the demographic shift could mean for

future employment growth over the period 2010-2060. The proposed methodology makes use of Eurostat'sdemographic projections (convergence scenario, Europop2010). It employs a set of assumptions related tofuture growth of the active population, building a high (maximum) and low (minimum) activity scenario. Thepaper then explores the potential of employment growth in the years ahead subject to these humanresources constraints.

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Luxembourg: Publications Office of the European Union, 2013

ISBN 978-92-79-32715-5ISSN 1977-4125doi: 10.2767/79370

© European Union, 2013Reproduction is authorised provided the source is acknowledged.

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Table of Contents

Summary ........................................................................................................4

1. Introduction.................................................................................................5 2. A brief demographic profile of Europe’s workforce .............................................7 3. A quantitative assessment of the impact of workforce contraction on the growthpotential of the economy...................................................................................9

3. 1 The analytical framework .........................................................................9 3. 2 A stylised model.................................................................................... 10 3.3 What are the perspectives in terms of future potential employment growth at EUlevel?......................................................................................................... 14 3.4 Can Europe sustain employment and GDP growth in the years ahead?........... 15

4. A brief assessment of relevant policy measures............................................... 23 4.1 Policies to increase overall employment..................................................... 23

4.1.1 Increasing working hours................................................................... 24

4.1.2 Increasing labour market participation of age groups beyond age 65 .......... 26 4.1.3 Maximising the potential contribution of migration................................. 28 4.1.4 Mobility: a barely tapped source of growth ........................................... 31 4.1.5 Reducing qualification mismatches ...................................................... 33

4.2 Policies to increase productivity................................................................ 34 4.2.1 Higher productivity through better education ........................................ 35 4.2.2 Higher productivity through training .................................................... 38

5. Conclusion and policy implications................................................................. 39 Bibliography .................................................................................................. 42 Annex 1: Modelling educational progression ....................................................... 46 Annex 2: Findings at EU Member State level ...................................................... 47


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Summary

Europe is confronted with important socio-economic challenges due to demographicageing. Their impact on the size and structure of the European workforce representsone of the key challenges in this context. The paper focuses on what the demographicshift could mean for future employment growth over the period 2010-2060. Theproposed methodology makes use of Eurostat's demographic projections (convergencescenario, Europop2010). It employs a set of assumptions related to future growth ofthe active population, building a high (maximum) and low (minimum) activityscenario. The paper then explores the potential of employment growth in the yearsahead subject to these human resources constraints.

The analysis shows that some of the economically strongest EU Member States willfind themselves confronted with serious employment growth constraints due to laboursupply bottlenecks already within the next 5 years, even under extremely high activity

assumptions. Several other Member States will face labour constrains over the nextdecade. Given the strong inertia of demographics, even total EU employment willstart shrinking in 10 to 20 years from now. Labour supply constrains will ariseconsiderably earlier in the case of highly educated workers.

The authors conclude that if European economies are to continue growing at awelfare-maintaining pace, the focus must be on productivity growth which will remainthe only renewable source of economic growth in the long run. EU productivity growthwill have to more than double within the next decade compared to the last twodecades' relatively modest performance. How could these important productivity gainsbe generated in a socially sustainable manner? The paper makes use of modelsimulations to investigate this question – focussing in particular on the potentialimpact of skills development and higher education.


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1. Introduction

The importance of the size and quality of human resources for competitiveness and

economic growth has attracted particular attention both in economic literature1

and inpolicy making. It is generally acknowledged that the path of economic growth of acountry is critically affected by the size, quality, and utilisation of its human resources.In the most recent years, the link between human resources and economic growth hasgained further attention in most industrialised countries due to the accelerated pace atwhich the workforce is ageing and declining. This is taking place in an increasinglycompetitive global economic environment which necessitates ever-faster structuraladjustments across economic sectors and the labour force.

At global level, Europe is at the forefront2 of these demographic trends. Following aperiod of almost 40 years of declining demographic dependency, often referred to asthe period of ‘demographic dividend’ 3 ,Europe is currently entering a period ofworkforce ageing and increasing demographic dependency as the baby-boom

generation progressively exits the labour market and joins the ranks of dependentpopulation.

Although at first glance the economic downturn and its depressing impact on economicgrowth and labour demand in particular appear to defer the growing demographicpressure on labour supply, this is not confirmed by the analysis of demographictrends. More specifically, the quantitative analysis presented in this paper clearlyshows that given how inert the ageing phenomenon is, this postponement effect isrelatively small and does not substantially affect the demographic challenges ahead.Some of the best performing EU economies, namely Germany, the Netherlands,Finland and Austria, are already facing labour supply bottlenecks due to the speed atwhich their workforces are ageing and the lack of labour reserves.

A number of important challenges arising from the on-going economic crisis are indirect interaction with the process of workforce ageing. In particular, during the last 5years, there were substantial job losses in many of the traditional, labour-intensivesectors, in particular construction, manufacturing and trade. However, studies onEurope’s future skills needs4 indicate that demand for specific skills in the mostdynamic sectors may continue to rise in the future, while demand for labour in a rangeof low-productivity sectors may keep declining. However, as age and education levelappear to be critical factors for promoting skill and geographical mobility, it becomesincreasingly difficult for policy makers to promote the employment of low skilledworkers made redundant in declining sectors of the economy.

This implies that even if there were to be a strong recovery in the years ahead, itwould be practically impossible for many of the workers made redundant in these

sectors to get an equivalent job since many of them show skills profiles which aredifferent from those needed in the most dynamic sectors of the economy. This leads tothe conclusion that a rapidly contracting and ageing workforce during a period of rapidstructural change in the economy (and labour demand in particular) may imply agrowing risk of labour mismatches which could worsen skill bottlenecks and hinderefforts to reduce unemployment.

1 For a literature overview on the link between Human Resources and Economic Growth see Platt et al (2012),Wilson/Briscoe (2004).2 Japan is confronted with more advanced ageing of its workforce while South Korea, the Russian Federation, United Statesand China are among the major global economic powers that will also face increased demographic pressure over the years

ahead. For more info see: UN World Population Prospects, the 2012 Revision http://esa.un.org/unpd/wpp/Excel-Data/population.htm 3 Bloom et al (2003), Coomans (2012), p. 200. 4 See for example CEDEFOP (2012).

http://esa.un.org/unpd/wpp/Excel-Data/population.htmhttp://esa.un.org/unpd/wpp/Excel-Data/population.htmhttp://esa.un.org/unpd/wpp/Excel-Data/population.htmhttp://esa.un.org/unpd/wpp/Excel-Data/population.htmhttp://esa.un.org/unpd/wpp/Excel-Data/population.htmhttp://esa.un.org/unpd/wpp/Excel-Data/population.htmhttp://esa.un.org/unpd/wpp/Excel-Data/population.htmhttp://esa.un.org/unpd/wpp/Excel-Data/population.htm


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Another growing concern relates to the chronically high youth unemploymentobserved in many member-States across the EU. It represents a serious risk for thefuture labour market performance of these generations both in terms of labour marketparticipation and productivity.

These considerations show the need for a more systematic study of workforcecontraction and its policy implications on future employment and economic growth.Defining an effective policy approach requires a profound understanding of theevolving demographic trends and their interactions with the on-going structuralchanges in the economy.

This paper aims to contribute to this important policy debate by exploring a wealth ofreliable information on the future size and quality of the EU labour market. Theprojection methodology used purposely avoids the hurdles of forecasting futureeconomic trends. Instead, it makes use of a maximum and a minimum activityscenario based on socio-demographic projections and assumptions about qualitativepopulation characteristics. This allows to get a clear insight on Europe’s potential to

sustain employment growth during the period from 2010 to 2060 under differenthypotheses about future economic performance.

The findings suggest that, even in the most optimistic activation scenarios, workforcedecline is practically unavoidable and that this will induce a decline in totalemployment at EU level within a time horizon already between 10 and 20 years. Howpolicy makers will respond to short term and longer term policy priorities within thischallenging policy context will be of critical importance for Europe’s future employmentand economic growth.

The quantitative analysis proposed in this paper provides policy implications clearingthis context. Over the next decade, investment in human resources development,activation policies can and should help cushion the impact of both structural

unemployment and labour force decline to the largest possible extent. It could helpboth to reduce unemployment and drive a faster economic recovery. However, theanalysis shows that for the most dynamic EU countries like Germany, Austria, Finlandand the Netherlands, this would not be enough, particularly if the economic outlookover the next decade becomes more favourable.5 The shrinking workforce will hinderemployment growth unless spectacular progress is made in a range of relevantpolicies including further to activation policies, substantially higher investment inhuman resources development incentives for higher intra-EU mobility and moreeffective economic migration and integration policies.

With employment set to decline in the long term, the paper provides evidence thatEurope’s future welfare will increasingly rely on its potential to strongly accelerateproductivity growth, at least until the effects of demographic transition on the EU

workforce is expected to end, at some time beyond 2050. In the multi-polar andhighly competitive globalised economy of tomorrow, it will be of utmost importance forEurope to retain and further develop its competitive edge by investing in innovation,education and skills and the range of relevant policies necessary to sustain highproductivity growth in the years ahead.

Following an introduction of the key issues related to the demographic challenge andthe future availability of human resources, section 2 provides a brief demographicprofile of Europe’s workforce. Section 3 focuses on the potential for futureemployment growth testing the sustainability of the available human resources atdifferent levels of future employment growth. It assesses what productivity gains will

5 The analysis in chapter 3.4 shows that it will be difficult for these Member-States to sustain an annual employment rateof 1 %, equal to the EU average attained during the period 2000-2008, even for 5 years.


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be necessary to sustain a hypothetical 2 % annual GDP growth path. Section 4 brieflyassesses potential policy action to increase employment (4.1) before focusing onhuman resource policies aiming at higher productivity (4.2). It provides model-basedevidence on the means by which a different educational mix and better skills formationcan increase productivity growth. Section 5 concludes with policy-relevantimplications. Country fiches in the annex illustrate the findings of the analysis atMember State level.

2. A brief demographic profile of Europe’s workforce

According to Eurostat’s Europop2010 demographic convergence scenario,6 the EUworking age population (aged 20-64 years) attained its maximum of 304 million in2012. It is now starting to decline, setting off a long period of higher demographicdependency. Today, there are some 1.6 dependent people in total per person aged

20-64 years in the EU-27; by 2060 the ratio will have risen to almost 2.

Graph 1: Long-term development of demographic dependency, EU-27

Annual changes in total demographic dependency rate (TDR), where TDR is theratio of total population / working-age population (aged 20-64)

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

>0: increasing demographic dependency


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Graph 2: The impact of demographic ageing on the working age population, EU-27

…change by age group since 2010 (%)Change of working age population since 2010 (%)

-20

-15

-10

-5

0

5

2 0 1 0

2 0 1 5

2 0 2 0

2 0 2 5

2 0 3 0

2 0 3 5

2 0 4 0

2 0 4 5

2 0 5 0

2 0 5 5

2 0 6 0

-20 -10 0 10 20

20-34

35-49

50-64

2030, change from 2010 (%)

2020, change from 2010 (%)

Source: Eurostat Europop2010 population projection, convergence scenario

Besides the quantitative effects of ageing on the workforce, one should also take intoaccount its structural effects; i.e. the changes it brings about in the workforce agestructure. This is particularly important since different age groups have differentcharacteristics in terms of activity rates and education levels. Although the decline insize of EU working age population is just starting, the effects due to changes in theage structure of workers are already visible. This is because the bulk of baby boomersare by now part of the 50+ age group while the younger age cohorts are considerablysmaller. This is important for at least two reasons. Firstly, the 50+ age group istraditionally less active than the prime age group. Secondly, since younger age groupstend to have higher education, the falling numbers of new entrants to the labourmarket considerably reduce the capacity of labour supply to adjust to the rapidlychanging skills needed, particularly in the high-skill segment.

Analysis produced jointly by the European Commission’s Directorate-General forEmployment and Social Affairs (DG EMPL) and the OECD shows that the proportion ofskilled workers among retirees will be significantly higher over the next decadecompared to the previous one due to the progressive retirement of the baby boomers.New entrants to the labour force with tertiary education are projected to decreasefrom 3.5 entrants for each retiree to 1.4. As a consequence, despite progress made interms of education levels, the study foresees a skills squeeze in the EU due todemographic ageing.7 Hence, the size of the highly skilled labour force is expected toincrease much more slowly than before.8 The risk of a skills squeeze is a growingpolicy concern since signs of economic recovery and emerging new employmentopportunities often go hand in hand with difficulties in satisfying the need for newskills in the fastest growing sectors of the economy. In turn, concerns over labour

demand become predominantly qualitative rather than quantitative in nature.9 Severalrecent studies converge to the conclusion that skilled employment will keep growing inthe decade ahead.10

7

OECD (2013, yet unpublished).8 OECD (2012), §§ 41, 45.9 CEDEFOP (2012).10 CEDEFOP (2010); World Economic Forum (2010).


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3. A quantitative assessment of the impact of workforcecontraction on the growth potential of the economy.

3. 1 The analytical frameworkThe proposed methodology aims to explore how Europe’s future human resources willbe able to sustain employment growth under different employment growth scenarios,in particular: How long could Europe as a whole - and each of its Member-States -sustain employment growth at annual levels ranging between 0-1.5% before reachingmaximum capacity? And then, what would that imply for Europe’s economic growth ina situation where employment cannot grow any more or even declines? What levels ofproductivity growth will be required to keep the EU economy growing? To investigatethese questions the proposed methodology avoids the uncertainties associated withthe traditional econometric exercise of active population forecasting. Economicbehaviour is treated as a parameter of the model rather than its outcome. Instead,the proposed model delimits the range of feasible future active population growth

paths by defining a low (minimum) and a high (maximum) activity scenario.

This approach does not contest the strong interaction between the demand and thesupply side in the labour market. The choice of this methodology is justified by thefact that it is extremely risky to rely on modelling of long-term economic trends or toanticipate future policy-making and its outcome. Instead, the proposed model is basedon the idea that it is possible to set up a space of possible future active populationgrowth scenarios which is delimited by an upper and a lower frontier.11 Morespecifically:

The low activity rate scenario reflects a continuation of the current particularly

unfavourable labour market situation. It describes a situation of persisting economicstagnation with no growth in activity and in which changes in activity rates relate onlyto (structural) demographic effects.

In contrast, the high activity rate scenario assumes an exceptionally favourableeconomic outlook allowing for an extremely high mobilisation of human resources inthe EU. This requires a number of very optimistic assumptions about future labourmarket participation behaviour. More specifically, the high activity scenario shows howmany more people would participate in the labour market if the unused pools ofhuman resources (namely women and older workers) could be better utilised and ifthe foreseen progress in education is fully reflected in terms of gains in participation(a well-educated and skilful workforce helps to improve both activity and employment

rates). Obviously, the size of those benefits would also depend on a variety of factors,in particular: the global economic environment which affects the demand side of theeconomy, the effectiveness of policy making12 and the overall competitiveness of theeconomy including the optimal functioning of the domestic labour market. Therefore,the high activity scenario should be seen as an extreme situation combining allfavourable trends on both the demand and the supply side.

11 To be methodologically in line with the EU2020-target to achieve a 75% employment rate for people aged 20-64 by2020, it is first assumed that employment and active population growth can only come from the population aged 20-64.

The assumption will be relaxed in section 4.1.2. below. 12 The high activity scenario assumes maximum policy outcomes also including the possibility of new policies whichnevertheless do not require a change in the Eurostat definition of working age population. However, the potential from afurther increase in the retirement age is treated separately in chapter 4.1.2.


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3. 2 A stylised model

The following technical assumptions are applied to the low and the high activity

scenario:

Low activity scenario

The low activity scenario takes account only of the demographic effects as projected inthe convergence scenario of Europop2010. That is, it includes the impact of workforcecontraction and the effect of the changing age structure on activity, keeping all otherfactors unchanged. This implies that activity rates by age group, sex and educationalattainment level are kept constant at 2011 levels. No further progress is assumed, sochanging overall activity rates only reflect structural changes (in age, sex andeducational structure). This appears realistic for the low activity scenario since theactivity rates at the starting year 2011 reflect a labour market situation at the peak of

the economic crisis.

High activity scenario

Alongside the purely demographic effects set out by Eurostat’s Europop2010convergence scenario, the high activity scenario includes highly optimistic assumptionson future behavioural changes in terms of higher activity rates. More specifically:

• Educational progress is taken on board using Coomans’ method (see Annex 1for details). Most Member-States have seen an increase in the number ofhighly educated young people at the expense of those holding basic degrees,while the share of medium educated people has stayed relatively stable. Basedon the educational progression seen over the period 2000-2011 for those agedbetween 25 and 34, we include a log-linear projection of the observed trendinto the coming decades.

Graph 3a shows that higher education has a measurable positive effect onlabour market participation. Looking at the activity rates, there is a 10 percentage point difference between high and medium-skilled people and a13

percentage point gap between medium and low-skilled people.

Graph 3a: Activity rates by educational attainment level, 20-64 age group, EU-27

60

65

70

75

80

85

90

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

LOW educated

MEDIUM educated

HIGH educated

Source: Eurostat EU Labour Force Survey (EU LFS)

Therefore it appears safe to assume that the trend towards a higher proportionof highly educated people will continue to have a positive impact on activity


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rates and hence on the size of the active population. However, following thelog-linear trend prolongation, the pace at which the number of high-skilled(low-skilled) workers is projected to grow (decline) from now on will be muchslower than it used to be in the recent past.

Graph 3b: Projection of total workforce’s educational attainment structure, based oncomputed educational progression of the 25-34 age group, EU-27

Source: Own calculations based on Eurostat EU LFS and Eurostat Europop2010 population projection,convergence scenario, method based on Coomans (2012), p. 202/203.

Graph 3b shows the projected share of the total working age populationholding high, medium and low educational degrees, following from theeducational progression of the age group 25-34 years. The impact of progressin education on activity is shown separately in Graph 7. Note that no further

educational progression is assumed for the age cohorts aged 35 years andolder. If one combines the age- and gender-specific activity rates byeducational attainment level with the projected population shares, this resultsin an increase of the overall EU activity rate from 75.7 % today to 77.7 % by2040. This would be purely the effect of education, not combined with othereffects (i.e., net of progress made in female and older workers participation).

• The female convergence effect is a purely behavioural assumption on activity.It is assumed that by 2030 female activity rates will converge to male levels forevery age group and educational level. The chart shows the femaleconvergence effect, (net of other effects such as higher activity of olderworkers, higher education).


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Graph 4: Female activity rate assumed to attain male activity rates by 2030 for eachage group and educational attainment level: activity rates in %

30

40

50

60

70

80

90

Males, age 20-64

Females, age 20-64

Source: Own calculations based on Eurostat EU LFS and Eurostat Europop2010 population projection,convergence scenario

• A further behavioural assumption includes the older-workers-effect :

Graph 5: Scenario of progression in the activity rate of older workers (age 55-64) to60 % by 2030, activity rate in %


The high scenario assumes a 20 percentage-point increase of the activity rateamong older workers by 2030. If there is an overlap with the femaleconvergence effect (i.e. for women aged 55-64) it is assumed that the twoeffects cumulate. The chart shows the isolated older workers effect, i.e., net ofother effects (higher female participation, higher education).

The resulting high and low scenarios for the EU labour force growth are illustrated inGraph 6 in terms of number of people and in percentage of working age population.Graph 6 shows that in the low scenario, where the only changes are due todemographics, the decline in the labour force already starts in 2013. According to thisscenario (with no progress in activity rates), by 2020, Europe will have lost 4 millionactive population compared to 2011. However, in the context of a more favourable

economic environment and a more effective activation strategy reflected in the highactivity scenario, Europe could mobilise some 14 million additional workers by 2020


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and another 9 million by 2030, countering the effects of the shrinking and ageingworkforce and maintaining positive growth of its active population until 2030. In fact,the activity rate would shift to 81% by 2020 and around 87% by 2030 and after.

Graph 6: EU-27, high and low activity scenarios of future activity growth

Working age Active Population, Active Population, Past em-

popul. (age 20-64) Low activity scenario High activity scenario ployment

EU-27Potential development of employment at given growth scenarios

Assumption: Further shift of activity rates, different scenarios

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% of Working Age Population (20-64 years)


The assumptions on activity rates among women and older workers are purelymechanical. Nevertheless, as the high activity scenario combines and accumulates anumber of beneficial effects on activity resulting in activity rates close to 90%, it couldwell be seen as the upper threshold of what is possible. The gap between high and lowactivity scenarios then provides a measure of the maximum gains in activity to beexpected under a very favourable economic and policy environment.


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3.3 What are the perspectives in terms of future potential employment

growth at EU level?

After setting out the higher and lower scenarios of potential growth in the EU labourforce (active population), the next step is to examine the sustainability of employmentgrowth on the basis of this set of labour force growth constraints. To answer thisquestion, we looked at the sustainability of four different employment growthscenarios ranging from 0 % p. a. to 1.5 % at 0.5 %-pt. intervals.

Graph 7: EU-27, high and low scenarios of future growth of active population

Working age Active populat ion Active Populat ion, Act ive Populat ion, Past em-

popul. (age 20-64) Low activity scenario High activity scenario Education Effect ployment

EU-27Potential development of employment at given growth scenarios

Assumption: Further shift of activity rates, different scenarios

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% of Working Age Population (20-64 years)

Employment

growth

scemaro :

1.5% p.a.

1% p.a.

0.5% p.a.

none

EU2020


Taking the scenario of low activity growth (red continuous line), we can see that, evenat 0 % employment growth, the EU employment level will cross the low activityscenario level by 2040. This implies that if the future activity outlook is best describedby the low activity scenario then all unemployment could have been absorbed by 2040due to workforce decline. However, this is quite improbable since this would require

absence of labour market mismatches. In reality, one would expect to see growinglabour mismatches as the economy approaches its activity limits. In such a case,employment in volume will start shrinking much earlier than in 2040. At 0.5 %employment growth, the lower scenario limit will be reached by 2024. The remainingtwo scenarios of higher employment growth at 1 and 1.5 % correspond to evenshorter periods of sustainable employment growth (2019 and 2017, respectively).Nevertheless, in practice it would be rather improbable to have a situation whererelatively high employment growth - at or higher than 1 % - would be paired withsuch a pessimistic assumption on activity13 since in practice labour shortages tend toencourage activity.

13 That would imply that strong demand for workers would attract many unemployed people, yet people that have beeninactive to date would still stay away from the labour market.


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Turning to the high activity scenario (blue line), it is projected that, with employmentgrowth at 1 %,14 the limit of active population will be reached around 2030. However,attaining such a dramatic improvement in terms of activity rates as set out in the highactivity scenario would be extremely difficult given the extremely generous nature ofthe assumptions made.

As a result, it is a question of years rather than generations until the workforce declinewill start inhibiting employment growth. The situation is likely to be even morerestrictive than follows from the simplistic approach presented so far. Morespecifically:

• The high activity scenario cumulates various effects which overlap in reality15 and is therefore to be seen as an upper, almost ideal, limit of what is possiblein terms of active population growth.

• At aggregate EU-27 level, both scenarios implicitly assume perfect mobility ofworkers across the borders of the 27 Member States - a very generous

assumption given the low levels of intra-EU mobility seen so far (section 4.1.4).• As said earlier, the methodology employed here assumes that all unemployed

people constitute a readily employable reserve of workers who couldimmediately respond to the arising labour market needs. This, however, is ahighly optimistic assumption. The rapid structural changes in the economyimply that labour demand is changing quickly while labour reserves find it moreand more difficult to respond due to their skill (and age) profiles. Skillsmismatches are the result. They imply that an increase in labour demand willnot automatically lead to an equivalent reduction in unemployment (section4.1.5).

• Finally, the relatively high employment growth rates observed until 2008(about 1% per year) were fuelled both by a strong global growth and an

increasingly plentiful supply of labour (as children of the baby-boomers andmigrants entered the job market); this in turn promoted economic activityexpansion; In the future, in case of a strong recovery of labour demand, labourscarcity may represent a much stronger constraint for employment growth dueto the advancement of workforce ageing and shrinking.

Relaxing the above assumptions would lead employment growth constraints tomaterialise much earlier and much more profoundly than those depicted by bothactivity scenarios.16

3.4 Can Europe sustain employment and GDP growth in the years

ahead?

A sustainable pattern of employment growth in the long run would theoreticallyrequire the active population and employment to grow at similar rates, a conditionwhich, as we showed in the earlier section, will be practically impossible to fulfil in thefuture, even under very generous assumptions.17

14 1 % employment growth is equal to the annual average growth rate observed during the period 2000-08 (before start ofthe crisis) and also to the rate needed to attain the EU 2020 employment objectives.15 For example: the older worker effect and the gender effect are assumed to cumulate for older women. Also, althoughhigher female labour market participation is partly due to better female education, both effects are taken separately and

hence cumulative in the high scenario.16 In that sense, even the low activity scenario could be seen as a rather favourable limit.17 Sustaining the EU working age population growth could require a doubling of net annual migration inflows over the nextdecade and even higher net inflows thereafter.


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Graph 8 illustrates the employment growth constraint and its implications for GDPgrowth. It depicts the situation shown in Graph 7, but in terms of (per-annum) growthrates rather than levels. The graph is divided into three parts. The first part on the leftillustrates the pre-crisis situation in terms of employment (green line) and productivity(red line) growth rates. It shows that between 2000 and 2008 Europe achievedaverage annual employment growth of 1 %. Together with an average annualproductivity gain of approximately 1 %, this led to annual average GDP growth (darkblue) of 2 %. The economic downturn has interrupted this relatively stable pattern ofgrowth. Between 2008 and 2011 (middle part of the Graph 8) both employment andproductivity growth collapsed18 with employment growth turning negative and averageproductivity growth averaging at a mere 0.4 % p.a.

The third part of the graph refers to the future. Based on the scenarios of high and lowactivity rates presented in section 3.2, it aims to provide an answer to the questionposed at the beginning of this section: Can Europe sustain employment and GDPgrowth in the years ahead? More specifically: will it be possible for the EU economy to

sustain 2 % annual GDP growth in the future as it did between 2000 and 2008?The projection illustrated in Graph 8 (at right) assumes that, from 2012 onwards, a

‘sustainable’ employment growth path (green line) of 1 % will be achieved at first.2 % GDP growth, the level deemed necessary to maintain current welfare standards,would require annual productivity growth of 1 % from 2012 onwards (red line). Inother words, productivity growth is a residual variable equal to the difference betweenthe GDP growth target (blue line) and employment growth (green line). Thecontinuation of the 1+1=2 average annual growth path observed between 2000 and2008 will be possible as long as employment growth is not constrained.

However, as employment growth will start falling due to the declining working-agepopulation, productivity growth will have to grow faster in order to compensate, i.e.,to keep GDP growth at 2 %. This is projected to happen by 2020 in the low activityscenario and 2031 in the high activity scenario. Hence, the duration of the periodduring which Europe will still be able to maintain its 1+1=2 growth path depends ontwo labour sources:

• Firstly, it depends on the size of the active population. This will have to takeaccount of both the accumulated stock of unemployed at the starting point andprojected demographic developments that determine future balances betweenlabour market entries and exits. The evolution of the low activity scenarioillustrates the potential of labour resources in that respect.

• Secondly, it depends on how successful policies will be in further increasingemployment and activity rates across all ages, genders and education levels.

The high activity scenario outlines an upper limit of what could be obtained ifpolicies of this kind were to be highly successful. The difference between thetwo scenarios represents this policy component. It offers the feasible outcomesdepending on the extent to which the available human resources are mobilised.

18 It is worth noting that this fall in productivity is to some extent due to short-term job protection measures which divertedsome of the pressure on employment towards cuts in hours worked to prevent an even steeper employment decline.


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Graph 8: Future employment growth potential and levels of productivity growthrequired to sustain 2 % GDP growth in EU-27

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2 0 0 0

2 0 0 2

2 0 0 4

2 0 0 6

2 0 0 8

2 0 1 0

2 0 1 2

2 0 1 4

2 0 1 6

2 0 1 8

2 0 2 0

2 0 2 2

2 0 2 4

2 0 2 6

2 0 2 8

2 0 3 0

2 0 3 2

2 0 3 4

2 0 3 6

2 0 3 8

2 0 4 0

Projected employment gr owth r ate, lo w act iv ity sc enar io Pr ojected employment gr owth r ate, high ac tivi ty sc enar io

Productivity growth required to have 2 % GDP growth, low activity scenario Productivity growth required to have 2 % GDP growth, high activity scenario

GDP growth assumed Past employment growth

Past productivity growth Past GDP growth

annual growth in %avg 2000-2008

future employment

growth potential:

+1% possible until 2019

(low sc.)

avg

2008-

2011

productivity growth needed

to sustain 2% GDP growth

(low sc.)



Under the low activity scenario (green line), Europe could sustain an employmentgrowth path at 1 % no longer than 2019 despite its current high levels of unused

labour reserves. The declining working-age population would actually dragemployment growth down to negative values as from 2021. In turn, Europe would findit difficult to sustain 2 % GDP growth after 2020 since it would be impossible tosustain positive employment growth any longer. Compensating for this drop inemployment would require a dramatic increase in productivity growth (red line) from1 % to as much as 2.5 % already required by 2021.

In the case of the high activity scenario, policies providing for a maximum utilisationof the available human resources (dashed green lines) would extend the possibility forgrowth at the‘1+1=2 %’ growth pattern for 12 more years, that is, from 2020 as setout in the low scenario to around 2032 in the high scenario. Hence, mobilising unusedhuman resources could provide the European economy with an additional decade ofemployment growth needed to sustain GDP growth at 2 %. However, it will be

practically impossible to sustain this growth path beyond 2032. The predictedworkforce decline will require ever higher rates of productivity growth (red dashedline) to sustain positive GDP growth. In fact, even assuming the high activity scenario,productivity growth rates would have to be at levels up to 2.5% annually in the longrun, more than twice as high as in the pre-crisis period up to 2008.Those would stillhave to be combined with employment rates beyond 85 %, as seen in Graph 7 above(right).

Although the situation varies considerably between EU Member States and evenregions within Member States,19 the pattern of future workforce shrinking is a commonchallenge affecting all Member States - with differences in terms of intensity and

19 Peschner (2011 and 2012) looks into Europe’s NUTS-2 regions. He shows that even under very optimistic assumptionsabout employment performance in those regions which have lagged behind so far, the EU would still have to multiply pre-crisis-level productivity gains over the decades to be able to compensate for the inevitable overall employment losses.


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September 2013 I 18

timing. We have made use of the same methodology as above for each individualMember State in the country fiches set out in Annex 2.

Graph 9a brings together the most salient information from the country analysis: it

shows how long each EU Member State could sustain a rate of employment growth at1 %. The length of the red bars indicate the number of years between the low andhigh activity scenario or, in other words, the extra period of time a country will gain ifit employs effective activation policies to make the best use of its unused labourreserves.

The chart shows a diverse situation in terms of future workforce constraints. A firstgrouping of countries, and in particular Germany, the Netherlands, Finland, Austriaand Bulgaria20, face more immediate risks of labour supply bottlenecks because oftheir very limited unused labour capacities and a rapid decline of working-agepopulation as projected according to Europop2010.

In this context, the labour market situation in Germany is the most interesting case,

both due to its advanced ageing pattern and to its impact on the European economyas a whole. The decline of the working-age population in Germany has been underwayfor a number of years. In addition, German labour market figures show relatively lowlevels of unemployment. As a result, further activation policies show relatively limitedpotential to generate further active population growth so that the difference betweenthe two scenarios is less pronounced. The results indicate that Germany could notsustain a 1 % employment growth path beyond 2019 even with maximum activationof its unused reserves, see Graph 9b. Over the next decade Germany will find itdifficult to sustain employment and its GDP growth path without recourse to muchhigher inflows of foreign workers and a substantial increase in its annual productivitygrowth (the Netherlands, Finland and Austria face similar challenges). As a result, fora 2% GDP growth, necessary productivity growth levels in Germany would peak atlevels around 3% annually in both scenarios, three times the pre-crisis productivitygrowth levels.

20 Despite above-average unemployment, Bulgaria faces similar workforce shortages. It could sustain employment growthat 1 % until 2020 at best. The working-age population is set to continue to shrink particularly quickly in that country.


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Graph 9a: Critical year after which 1 % employment growth will not be possible anymore, EU countries

2015

2020

2025

2030

2035

2040

N e t h e r l a n d s

G e r m a n y

M a l t a

A u s t r i a

F i n l a n d

B u l g a r i a

C z e c h R e p u b l i c

R o m a n i a

D e n m a r k

P o l a n d

S l o v e n i a

E U - 2 7

B e l g i u m

F r a n c e

E s t o n i a

I t a l y

L a t v i a

H u n g a r y

U n i t e d K i n g d o m

L i t h u a n i a

S w e d e n

P o r t u g a l

S l o v a k i a

G r e e c e

L u x e m b o u r g

S p a i n

C y p r u s

I r e l a n d

Critical year,

high activity

scenario

Critical year,

low activity

scenario

Source: Own calculations based on Eurostat EU LFS and Eurostat Europop 2010 population projection,

convergence scenario

Another, more diversified, group of Member States have relatively larger reserves ofunused labour capacity (longer bars in Graph 9a). These are countries with either arelatively favourable demographic profile in terms of workforce growth (Ireland, UK,Belgium, Cyprus, Luxembourg) and/or countries with substantial pools of unusedlabour capacity due, for instance, to low female participation or faster educationalprogress (as in the Mediterranean countries). These countries could extend theirlabour supply potential considerably through more effective activation policies.


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Graph 9b: Future employment growth potential and levels of productivity growthrequired to sustain 2 % GDP growth, example of Germany

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

2 0 0 0

2 0 0 2

2 0 0 4

2 0 0 6

2 0 0 8

2 0 1 0

2 0 1 2

2 0 1 4

2 0 1 6

2 0 1 8

2 0 2 0

2 0 2 2

2 0 2 4

2 0 2 6

2 0 2 8

2 0 3 0

2 0 3 2

2 0 3 4

2 0 3 6

2 0 3 8

2 0 4 0

Pr ojected employment gr owth r ate, low act iv ity scena rio Pr ojected employment gr owth r ate, high act ivi ty scen ar io

Productivity growth required to have 2 % GDP growth, low activity scenario Productivity growth required to have 2 % GDP growth, high activity scenario

GDP growth assumed Past employment growth

Past productivity growth Past GDP growth

annual growth in %avg 2000-2008 avg

2008-

2011


Source: Own calculations based on Eurostat EU-LFS and Eurostat Europop2010 population projection,convergence scenario

Labour market constraints appear more striking when focusing specifically on high-skilled labour needs. This is of critical importance given that high-skilled employmentis a decisive determinant of economic growth due to its direct link with productivity,investment and total employment.21 How long could Europe sustain a 1% growth pathof highly educated employment against the background of a rapid shrinkage of thehighly educated workforce?

Graph 9c is based on the low activity scenario.22 The black squares indicate the yearafter which a total employment growth path of 1 % stops being feasible. These pointscorrespond to the lower end of the bars of Graph 9a. The bright circles indicate thesame figure, but only for highly educated workers’ employment. The graph shows thatemployment growth at 1 % for the highly educated will be inhibited well before theentire workforce becomes scarce although educational progress is projected tocontinue. This is because the demand for the highly educated is considerably strongerthan average labour demand and the corresponding unused labour resources aretherefore much more limited.23

21 See section 4.2 below.22 We limit the analysis here to the low activity scenario. This is because in the vast majority of Member States the

bottlenecks in terms of highly skilled workers appear already within the current decade and therefore the results in the caseof high activity scenario would not be substantially different. .23 In 2011, average unemployment amongst the highly educated was 5.6 % whereas total unemployment was 9.7 %according to Eurostat EU Labour Force Survey.


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September 2013 I 21

Graph 9c: Critical year after which 1 % employment growth will not be possible fortotal and for highly educated employment: EU countries in the low activity scenario

2010

2015

2020

2025

2030

2035

2040

2045

M a l t a


G e r m a n y

A u s t r i a

F i n l a n d

B u l g a r i a

H u n g a r y


I t a l y

C y p r u s

R o m a n i a

E U - 2 7

B e l g i u m

F r a n c e

I r e l a n d

P o l a n d

S l o v e n i a

P o r t u g a l

S l o v a k i a

E s t o n i a

D e n m a r k


S p a i n

S w e d e n

G r e e c e

L a t v i a

L i t h u a n i a

L u x e m b o u r g

critical year, total

critical year, high-skilled

Source: Own calculations based on Eurostat EU LFS and Eurostat Europop2010 population projections,convergence scenario

In most EU Member States the bottlenecks for the highly educated arise within thecurrent decade, several years before total employment growth at 1 % becomesunsustainable. It is particularly interesting to see that this kind of labour constraintalso happens to countries with relatively larger overall labour reserves, such asIreland, Cyprus and Spain. This is mainly because the economic crisis had less of animpact on the employment/activity of highly skilled people than the correspondingaverages. In turn, due to the long economic crisis, the majority of Member Stateshave accumulated a human resources ‘buffer’ which is mainly composed of medium-and low-skilled workers. This buffer does not exist to that extent for high-skilledworkers.24 In most EU Member States employment rates among the highly educatedare currently above the pre-crisis level. Hence, in the absence of adequate and pro-active human resources policies, a lack of skilled labour could constitute an earlybrake on growth even for countries that have significant labour reserves. It should beunderlined that this holds also true from the perspective of productivity growth: If theeconomy grows and absorbs the unused labour capacity, the average skill level inemployment will decrease.

Scarcity of labour, particularly of the highly skilled, has the potential to impede futureeconomic growth. However, it is often argued that, although GDP may stagnate oreven decline, demographic ageing could result in an increase in per capita income.There is no evidence to support this rather simplistic view. Quite the contrary: lookingat the next four decades, the way in which the total population is expected to evolverelative to the working age population is likely to add to rather than solve the problemin most EU Member States.

24 The bottleneck at the high-skill end is actually a combination of two competing factors. On one hand, as mentioned

above, education attainment keeps rising and the overall supply of skilled labour grows at the expense of low-skilled labour.However, this is more than offset by the fact that most unused labour capacity (the unemployed) are less-well educated. Ifand when the EU economy restarts its growth and demands more labour, it will be constrained by the available unusedmanpower as it is low-skilled.


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September 2013 I 22

This is because in most Member States the decline of the working age population willstart much earlier than the decline of the total population. Graph 10a providesevidence of this phenomenon. The red dots indicate the year when the working agepopulation will start to decline. The opposite end of the blue bar shows when the totalpopulation will start to decline. A red dot on top of a blue bar shows that the totalpopulation will start shrinking earlier than the population at working age. This is trueonly for Hungary, Lithuania and Romania. At EU level, the gap separating the twoevents is 30 years. The EU total population will continue to increase and is set todecline only from 2043, while the working age population will start to decline in 2013already. This time differential will mean that, for a relatively long period, a decliningworking-age population will have to generate income for an increasing totalpopulation, reflecting higher rather than lower economic dependency and thus morepressure on future productivity gains.

Graph 10a: Starting years of decline of total population and working age population

1990

2000

2010

2020

2030

2040

2050

2060

E U - 2 7

B e l g i u m

B u l g a r i a


D e n m a r k

G e r m a n y

F r a n c e

I r e l a n d

G r e e c e

S p a i n

E s t o n i a

I t a l y

C y p r u s

L a t v i a

L i t h u a n i a

L u x e m b o u r g

H u n g a r y

M a l t a


A u s t r i a

P o l a n d

P o r t u g a l

R o m a n i a

S l o v e n i a

S l o v a k i a

F i n l a n d

S w e d e n


trend in

total population

starts shrinking

trend in

WAP starts

shrinking

both total

population

and WAP were

already shrinking

shrinking in 1992

Source: Own calculations based on Eurostat Europop2010 population projection, convergence scenario

Graph 10b shows the current situation in the EU-27, whereby 2 % average annualGDP growth is currently equivalent to a necessary 2.3 % growth in GDP per capita as

the total EU population is growing by some 0.3 % per year. However, the differencewill narrow in future decades (see thin blue line) and turn negative only after 2040. Asa result, the pressure on productivity will become even stronger as the total EUpopulation continues to grow (see thin orange lines). Only after 2040 will the declinein total population give relief, and even then, it will not exceed 0.2 percentage pointsby 2060. Hence, the result in per-capita terms stays the same as in nominal terms:productivity in the EU will have to grow twice as quickly as it grew before the crisis inorder to counterbalance the impact of a declining workforce on economic growth.25

25 Even for countries that are already facing small gaps between total and working age population decline, such as theBaltic States and Germany, this lower economic dependency will not provide real relief when the current high levels of

public indebtedness are taken into account. During the crisis, average government gross debt in the EU-27 soared to 82 %of GDP. Government debt will have to be repaid over the coming years. If the population shrinks, the per capita debtburden will be heavier when repayment is due. Hence, at given employment levels, higher productivity growth is needed tosustain welfare levels and pay down the accumulated debts.


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Graph 10b: Future employment growth potential and levels of productivity growthrequired to sustain 2 % GDP growth at EU27 — taking into account total populationchange

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

2 0 1 2

2 0 1 4

2 0 1 6

2 0 1 8

2 0 2 0

2 0 2 2

2 0 2 4

2 0 2 6

2 0 2 8

2 0 3 0

2 0 3 2

2 0 3 4

2 0 3 6

2 0 3 8

2 0 4 0

Projected employment growth rate, low activity scenario

Projected employment growth rate, high activity scenarioProductivity growth required to have 2 % GDP growth, low activity scenarioProductivity growth required to have 2 % GDP growth, high activity scenarioGDP growth assumedProductivity growth required, taking into account population change

Source: Own calculations based on Eurostat EU LFS and Eurostat Europop2010 population projections,convergence scenario

The analysis so far showed that for a number of EU Member States, includingGermany, Europe’s largest economy, and for Europe as a whole, it may be impossibleto reach a sustainable path of employment growth at 1 % due to labour forceshortages that will become apparent already before the end of this decade. Policiesthat seek to expand labour supply will be particularly important in the next decade to

make best use of the available human resources. Looking further into the future, theanalysis indicates that even if successful labour supply policies are introduced withinthe next decade, they will not prove sufficient for sustaining employment growth inthe EU over the longer term due to the shrinking workforce. The results suggest thatEurope’s GDP growth will depend largely on its ability to strongly accelerateproductivity growth over the coming decades.

4. A brief assessment of relevant policy measures

4.1 Policies to increase overall employmentHowever, from short to medium-term perspective, policies to increase overallemployment can and should help offset the labour force decline to the largest possibleextent. They could also contribute to a faster economic recovery.

It is still crucial to introduce an effective policy mix involving investment in humanresources development, activation, incentives for higher intra-EU mobility andeffective economic migration. Nevertheless, these policies should be carefullyassessed, taking into account the specific characteristics of each economy and therealities of an ageing workforce. The brief overview of policies discussed in this sectionis far from exhaustive, providing only some critical input to this important policydebate.


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September 2013 I 24

4.1.1 Increasing working hours

One frequently mentioned policy measure is to increase working hours. This appearsquite relevant since productivity as represented in the above analysis is defined as

per-capita production, i.e.,

(1) P = GDP / person employed.

Technically, this is

(2) P = Ph * h / employed, with Ph = GDP / h

i.e., the product of hourly productivity (Ph) and the total hours worked (h) per personemployed. Therefore, one could consider relieving the pressure on per-capitaproductivity P by just working longer hours (increase h). Without discussing the ideaat length, some reservations on this approach deserve mentioning.

The first concern is with regard to its feasibility. Actual weekly working hours havehad a strong tendency to decline since decades. Reversing the trend will be extremelydifficult as it is anchored in gradual but fundamental changes in the world of labourwhich have been taking place in recent decades. These include higher proportions ofwomen and older workers in the workforce, new types of labour contracts, technicalinnovations and the increasing significance of part-time work. Many of these changeshave been beneficial for the quality of work, flexibility and higher productivity.

Graph 11: Actual weekly working hours in main job in the EU - statistical breaks(marked in red) in 1995 (EU15), 2005 (EU25), 2007 (EU27) -

Source: Eurostat EU LFS

36.5

37.0

37.5

38.0

38.5

39.0

39.5

1 9 8 7

1 9 8 8

1 9 8 9

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

Secondly, increasing working hours appears to be a finite rather than a sustainablesource of higher production in the long term. Even if the EU could succeed inincreasing weekly working hours over the coming decades from, say, 37 to 38 hoursper week on average, this could happen only once. From the political perspective, asubsequent increase from 38 to 39 hours would be even harder to achieve.

Thirdly, there is strong theoretical and empirical evidence that Ph and (h/employed)are not mutually independent. Increasing labour units by simply letting people worklonger may increase production per worker but, all things being equal, may also result


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September 2013 I 25

in lower hourly productivity Ph, following Gossen’s law of a productive factor’sdecreasing marginal productivity. Studies find evidence for this micro-theoreticrestriction.26 In fact, evidence provided by the International Labour Organizationsuggests that factors related to the quality of work such as physiological aspects,motivation and work organisation have an impact on individual productivity as thenumber of hours worked changes.27

Finally, there could be a similar effect as regards the number of people inemployment. If an increase in h were to be at the expense of employment growth to acertain extent, this would imply that P in equation (2) would grow less thanproportionally to h. Graph 12 shows the average proportional employment gains peryear between 2000 and 2008 (excluding the crisis) for EU-27 Member States (bluecurve). The red curve depicts the difference between the annual average percentagechange in P and the change in Ph - which according to (2) is equivalent to the changein the number of hours worked per person employed. There is a negative cross-country correlation between the two.

Graph 12: Employment change and changes in working hours per person employedbetween 2000 and 2008, annual average in EU countries

Correlation: -0.4

-1.4%

-1.2%

-1.0%

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

E U - 2 7

B e l g i u m

B u l g a r i a


D e n m a r k

G e r m a n y

E s t o n i a

I r e l a n d

G r e e c e

S p a i n

F r a n c e

I t a l y

C y p r u s

L a t v i a

L i t h u a n i a

L u x e m b o u r g

H u n g a r y

M a l t a


A u s t r i a

P o l a n d

P o r t u g a l

R o m a n i a

S l o v e n i a

S l o v a k i a

F i n l a n d

S w e d e n


empl

Diff (shift working hours)

Source: Own calculations based on Eurostat EU LFS, National Accounts

This finding is far from suggesting causalities, and evidence on that point is anythingbut clear.28 But particularly in the case of older workers or women, where employmentgains have been by far the strongest, it becomes intuitive: In order to attract thosegroups for the labour market, they would need to be offered attractive workingconditions, including part-time work, gradual phasing out and the possibility tocombine working life with family commitments - all resulting in reduced working time.

In conclusion, the quantitative evidence supporting the hypothesis of a positiverelation between hours worked per worker and production per capita as suggested byequation (2) has not yet been firmly established. Depending on many parameters,namely in relation to the job and workers’ profiles, working longer hours may havequite a diverse impact on labour market participation or/and hourly productivity. For

26

Golden (2005) presents evidence on p. 5.27 For an overview: International Labour Organization (2004).28 In fact, there are also studies finding that reducing working hours could bring about employment losses via adaptationsof wages (increasing labour costs). See, for example, Steiner and Peters (2000) for Western Germany.


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September 2013 I 26

older workers or other categories of workers with a high dependency on working timeflexibility, such policy may prove counter-effective. In turn, increasing working hoursacross the board may not have the expected positive effects on per-capita productivitysince parts of the positive impetus may be absorbed by counter-effects on hourlyproductivity or employment. There are also questions about how feasible it would beto implement since it would entail reversing decades-long trends in established workorganisation and production processes. Finally, increasing working hours, even ifsuccessful, is not a permanent source of growth.

4.1.2 Increasing labour market participation of age groups beyond age65

The analysis presented in this paper so far has defined the working age population asthe number of people aged between 20 and 64. This definition was introduced in theEU at the launch of the ‘Europe 2020’ strategy back in 2010, when the EU defined its

75 % employment rate objective for the 20 to 64 year-olds. However, recent policyinitiatives to activate older workers and, in particular, legislation introduced by someMember States to increase the statutory retirement age for state pensions beyond theage of 65,29 have also drawn policy attention to the labour market outcomes of thoseaged over 65. In fact, maximising the benefits of living longer while being more activewas one of the concerns addressed by the European Year for Active Ageing andSolidarity between Generations (2012).30

Currently, the EU average employment rate for older people (those aged 65 to 69)does not exceed 10

%. As more numerous and better educated baby boom generationhas just started to enter this age group, their potential contribution to the labourmarket may increase considerably in the coming decades. This is why many policymakers are increasingly interested in this age group. Recent experience isencouraging. After the launch of the Lisbon strategy, in the years between 2000 and2010, Member States made considerable efforts to improve older people’s labourmarket outcomes. As can be seen in Graph 13, there are reasons for optimism whenlooking at people aged between 55 and 64 years, for whom the Lisbon target is a50 % employment rate. Employment in that age group has grown by more than 9million in the EU-27 (over 7 million for EU-15). Employment policies targeted at olderpeople were successful, although the target was not fully met. Research carried out bythe European Commission has also shown that a number of policy measures toactivate older workers could continue to be effective tools to further shift olderpeople’s employment rates in the future.31

29 According to MISSOC (Mutual Information System on Social Protection), Bulgaria, Finland, France, Germany, Ireland,Italy, Poland, Sweden, and the UK have either introduced or envisage pensionable ages beyond 65 years for at least part of

the workforce. See http://www.missoc.org/MISSOC/comparativeTables.30 European Commission (2012:7), p. 28.31 See European Commission (2011:1), p. 221 – 229, on for a simulation with DG EMPL’s Labour Market Model, particularlyon the impact of increasing statutory retirement ages, reducing labour costs for older workers, and training subsidies.

http://www.missoc.org/MISSOC/comparativeTabl

Documents

Growth Potential of EU Human Resources _2013 Final_rev2