25/06/2010

By Dr Michael Heise

Data on youth unemployment in the EU has set alarm bells ringing. Eurostat reports more than 40% of teenagers and young adults in Spain, and nearly 45% in Latvia, are out of work. The rate among 15 to 24-year olds in the EU averages 20.6%. Economic downturn has aggravated a development that results from high numbers of school leavers meeting already tight labour markets and deficiencies in education. While the problem can only be tackled by increasing efforts to adapt educational systems, demographic developments will ease the pressure on labour markets.
The downward trend in birth rates over several decades means that 2010 will be the first year in which EU citizens leaving working life will outnumber candidates seeking their first step on the career ladder. According to Eurostat, the EU is home to around 28.6m citizens aged 15 to 20, with 28.8m aged 60 to 65. So the number of people near or at retirement will be 220,000 more than the number of school-leavers seeking work this year. Even in 2009, the number of 15 to 19-year olds outstripped those aged 60 to 65 by 1.3m. As the baby boomer generation makes its transition into retirement, this gap will steadily widen – rising to 8.3m by 2030.
The only other G-20 state facing the same problem is Japan, where around 6.0m young people aged 15 to 20 are available to replace 10.0m 60 to 64-year olds. By the end of the decade, however, the number of school leavers in Russia, Canada, South Korea and China will also fall short of the number of employees nearing retirement. This is associated, both in these countries and in the EU, with a drop in absolute terms, in the potential economically active population; i.e. the segment of population of working age, between 15 and 64.

An ageing and shrinking workforce
In absolute terms, the decline in China will be most pronounced. UN data shows the number of Chinese of working age falling 44.7m by 2030. As a proportion of the entire labour force though, a decline from the current level of 918.2m to 873.6m equates to only 4.9% – far less than the 13m forecast to hit Japan, which translates into a 16% drop.
The number of people of working age in the EU is also expected to decline, by 13m by 2030 reducing the labour force from 335m to 322m. Although this represents a drop of 3.9% in relative terms, the trend becomes far more problematic if we consider the role of individual member states. The eastern European member states look set to be hit particularly hard by ageing labour forces. Eurostat predicts that by 2030, the number of Bulgarians of working age will have fallen by 17%. Whereas Bulgaria’s labour market currently boasts 5.2m people aged 15 to 64, this group will number only 4.3m within 20 years, more than a third of whom will be aged over 50. The situation in the Baltic states and in Poland is little better. Latvia’s labour force is expected to contract 16% by 2030, with declines of 15% for Lithuania, 13% for Poland and 12% for Estonia. In absolute terms, Germany and Poland show the most marked decline in labour force numbers within the EU: Germany’s force is likely to contract by nearly 12%, meaning it will lose 6.3m people of working age. In Poland, the 13% drop slices 3.6m people off the labour force.
Exceptions to the rule are found in countries that boasted relatively high birth rates into the 1980s and beyond, like Spain and Ireland, or those with high immigration levels such as the UK and Luxembourg. Eurostat expects the working age population in these countries to keep growing until 2030, with Ireland likely to report the strongest growth with 20%. As for major industrialised nations outside the EU, the US is in a similarly comfortable situation with its working age population also expected to grow further. This trend is attributable mainly to its attractiveness as an immigration destination and a rise in the birth rate from 1.8 to 2.1 children per woman since 1980.

Solution or problem?
Does this mean that Europe’s labour market problems will largely resolve themselves? Sadly, it would be naïve to imagine that unemployment will disappear because of the shrinking working population. Even today, it is largely a structural issue. The educational and training background of many job seekers is incompatible with labour market requirements; evident in complaints about a lack of specialist employees, and efforts by many EU states to be more attractive to highly-qualified young employees from abroad. Immigration, however, is not a cure-all solution: the number of immigrants required to close the workforce gap created by demographic changes would strain many countries’ integration programmes too far.
Tackling unemployment by improving further education and training is the only alternative. Any measures must focus on today’s young generation. Studies show that the longer the period between leaving school and starting vocational training, the harder it is for young people to integrate into working life. The fewer young people who manage to secure a skilled vocational training position today, the fewer the number of further training candidates to provide the economy with the specialists it will need in a few years’ time. But the problems are not restricted to the availability of vocational traineeships. The last German Federal Education Report in 2008, revealed one in five vocational training contracts was terminated early. This will exacerbate the lack of skilled workers already sparked by an ageing population.
So does Europe face an impoverished future? Will demographic change erode economic momentum? Not necessarily. As well as stepping up education policy drives, the problem can be met by adjusting working times and conditions to suit the needs of an ageing population. After all, in future one in three people of working age will be over 50, with a third of this group aged 60 or more. It is precisely the people nearing retirement age who are often no longer part of working life today. Statistics show that only around one third of all people aged 60 to 64 in the EU are still in work. ILO statistics reveal major differences between individual countries: Hungary is bottom of the scale at 13.3%, while Sweden leads with 63.0% of this age group still in work. If the rest of Europe matched Sweden, more than 8m additional employees would be available by 2030.
So cutting youth unemployment, while increasing the proportion of older people in work is the challenge for labour market policy. Key milestones have already been achieved towards this objective, with moves to reduce early retirement incentives in many EU countries. The next task is creating the right environment in the labour market. This requires new thinking by HR departments. Instead of sending employees over 50 into early retirement, companies are now called upon to find flexible solutions for their older workers. It is also time to shed the preconception that they are less productive than their younger counterparts. In reality, older workers have different strengths, with more experience and a keener eye for quality. In view of the changing demands of working life, “lifelong learning” is growing in importance. Companies will have to accelerate investment in further training. With the number of people departing working life set to outstrip those replacing them, the question as to how to transfer expertise within a company will be an ever more pressing. Action has to be taken to prevent years of knowledge being squandered as an entire generation of employees steps into retirement.
The challenges associated with demographic change are considerable. If the EU can master them, it can serve as a role model in the face of an ageing population worldwide – while easing the strain on its social security systems.

Dr Michael Heise is chief economist and head of corporate development for Allianz SE