Academic Literature

Aging and Shrinking Labor Forces in Europe – Economic long-term outlooks often too pessimistic

Demographic aging and accompanying shrinking labor forces are common phenomena throughout the developed world. There is a widespread notion that societal aging will put significant pressure on public budgets, a view supported by recent OECD projections. Expenditures for public health are expected to rise, old-age pension systems already are burdened by an imbalance of working and retired population shares. This may threaten governments’ capacities to fund social welfare systems and the provision of other vital public goods, like education or infrastructure.

Such pessimistic outlooks often neglect possible developments on the revenue side of governments’ budgets, and ignore important interrelations between demographic transitions and labor market outcomes. If, for example, a shrinking labor force is becoming better educated at the same time, average wages might increase. Additionally, if there is a scarcity of labor, standard economic theory predicts that wages should increase in order to stimulate labor supply. Future tax revenues may therefore increase despite population shrinkage.

Irrespective the pessimistic or optimistic scenario, there are two mega-trends for the future European labor force. While becoming older, EU labor forces are projected to become better educated at the same time (Figure 1), with the consequence of rising average wages throughout Europe.

Figure 1

These changes in size and education of the work force have important fiscal consequences.

Chosen excerpts by Job Market Monitor. Read the whole story at  Economic long-term outlooks often too pessimistic | IZA Newsroom

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