NEWS Release - The Euro Area Workforce is Aging, Costing Growth
Posted on August 17, 2016 by iMFdirect By Shekhar Aiyar, Christian Ebeke, and Xiaobo Shao
In parallel to the aging of the general population, the workforce in the euro area is also growing older. This could cause productivity growth to decline in the years ahead, raising another policy challenge for governments already dealing with legacies from the crisis such as high unemployment and debt.
The euro area’s population is expected to grow significantly older over the next couple of decades. This has two components. First, the number of retirees is set to grow compared to the people of working age (15–64) in the region. Second, and much less examined, the average age of people within the labor force will rise: the share of workers aged 55–64 is forecast to increase by a third, from 15 percent to 20 percent, over the next two decades (Chart 1).
What is the likely impact of such workforce aging? If different age cohorts within the workforce have different levels of productivity, then clearly average productivity will be affected by changes in the age distribution. But in which direction?
There are several different theories regarding age-related effects on productivity. On the one hand, accumulated years of work experience could make older workers more productive. On the other hand, frailer health and obsolete skills could reduce their productivity, at least beyond a certain threshold. While it is difficult to generalize across occupations, the consensus in the literature is that productivity increases with age at first, peaking sometime in the 40s or 50s. Then it diminishes.
Empirical estimates
We use a sample of European countries from 1950 to 2014 to examine the relationship between workforce aging and labor productivity. Correcting for various econometric pitfalls—such as reverse causality—we find that workforce aging significantly reduces output per worker. A five percentage point increase in the share of workers aged 55–64 is associated with a decrease in labor productivity of about three percent.
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