A significant amount of research has been published on the potential economic consequences of population aging in developed economies. One topic that has received repeated attention is the expected shrinkage in absolute and relative terms of the working population between the ages 15 and 65. Concurrently, the share of people above the age of 65 is projected to increase significantly in all European countries. If patterns of economic activity stay at current levels, the ratio of the number of people who are not economically active to the number of people that are – i.e., the labor force – is going to increase, which is traditionally seen as a threat to the sustainability of social welfare systems and economic growth.
The majority of existing long-term labor force projections are based on explicit assumptions about the future development of age- and sex-specific participation rates, which are then applied to age- and sex-specific population projections. This allows estimating the absolute future size of the labor force as well as its composition by age and sex. However, the absolute and relative size of the labor force is only one aspect when it comes to estimating the consequences for future total output and economic growth. The fact that a smaller but more productive labor force might be able to alleviate some or all of the expected financial consequences of population aging is another aspect that is increasingly recognized and quantified. The positive relationship between level of educational attainment and productivity, measured mostly by looking at the returns to education, has been shown in many contexts and for countries of various stages of development.
One expected consequence of population aging in Europe is the shrinkage of the labor force. Most existing labor force projections allow only inferences about the size and age structure of the future labor force.
OBJECTIVE AND METHODS
In comparison to existing labor force projections, which disaggregate only by age and sex, these projections include information about the highest level of educational attainment (tertiary vs. non-tertiary education), so that an additional level of heterogeneity in labor force participation is considered. This heterogeneity enters the projection methodology through population projection data as well as labor force participation data, since both components are decomposed in the three dimensions of age, sex, and education. Based on data from the European Labor Force Survey (EU LFS), three scenarios were designed to project the economically active population for 26 EU countries up to 2053.
Adding the educational dimension to labor force projections discloses a significant shift towards tertiary education degrees between 2008 and 2053. This educational upgrading of the European labor force is not driven by developments in a few large countries but can be expected to take place in each of the 26 analyzed countries.
A better educated but shrinking labor force is likely to be able to alleviate some of the anticipated economic consequences of population aging. The presented projections of education-specific labor supply can serve as inputs into forecasts of economic growth that include educational differentials in labor productivity.