The labour market and the challenge of population ageing
Published at 10 June 2024
In a report as far back as 20061, the OECD considered the ageing of the population to be both a challenge and an opportunity for the labour market. A challenge, as an ageing population has a negative impact on the level of the working population and hence on the labour’s supply. The report also highlighted seniors’ low workforce participation rate compared to the rest of the population. But an ageing population can also be an opportunity to strengthen intergenerational links by raising seniors’ participation rate. As we saw in article n°2 of our series, population ageing is a global trend affecting most developed countries, albeit to different degrees, with Asia and Europe the most exposed.
The workforce has already shrunk in many countries
One of the effects of population ageing can be found first of all in a slower increase, followed by a decline, of the population of working age, i.e., aged 15 to 64, as defined by the OECD. It is already shrinking in absolute terms in many developed countries, including China and in Europe.
The OECD believes that the acceleration of population ageing is incurring adjustment costs for companies, which will have to manage the heavy outflows of workers from the baby-boomer generation, while simultaneously having to recruit and train employees from a shrinking working population reserve.
This is now causing historically high hiring difficulties in countries that had not experienced such difficulties for several decades, and it could cause bottlenecks on the labour market.
One issue that then arises is the impact of population ageing on the unemployment rate. Various studies have all found that it is more difficult to estimate the impact of population ageing on companies’ demand for labour than on the supply of labour. Even so, there is general agreement that demographic change will at first boost the employment rate, as demand for labour declines less rapidly than the working population. But other factors also come into play, such as shifts in demand components or the use of technology.
Some sectors will be hit harder than others by population ageing, due to their respective age pyramids and their growing need for workers – public services in some European countries, healthcare and, more generally, personal services and care. Hiring difficulties are likely to raise employees’ negotiating clout and force companies to offer higher wages when hiring and hence have an impact on inflation. However, an excessively fast adjustment in wages would have a negative impact on demand for labour.
The issue of including seniors in the labour market
The rising workforce participation rate of older persons could slow and postpone the shrinking of the working population. The participation rate tends to drop drastically with age. Based on data from 2022, it exceeded 75% among the population aged 15-64 (on average in the OECD), then slipped to 67% in the 55-64 age group, before dropping to 13% in persons older than 64.
However, the participation rate of persons aged 55 to 64 has risen considerably in almost all OECD countries over the past 20 years, due mainly to successive reforms of pension systems. It has risen from 46% in 2000 to 67% in 2022, i.e., faster than the participation rate of the population of working age as a whole.
Other factors have also contributed to raising seniors’ participation rate, including longer life expectancy, higher educational levels, greater life-long training opportunities, with targeted measures for seniors, and improved working conditions for the oldest workers. There now seems to be little prospect for raising seniors’ participation rate any further. Among the possible solutions, the OECD advocates combatting obstacles to employing seniors but also eliminating work-disincentivising mechanisms, such as early retirement, job-search waivers, and others.
A complex relationship between productivity and ageing
Neurosciences2 show that cognitive capacities decline with age, but that this can be offset in part by experience and compensation strategies. Physical capacities also diminish with age.
In an article from 20223, the ECB cited several studies on the links between ageing and work productivity, which came to diverging conclusions. It is commonly agreed that there exists a U-shaped relationship between age and employee productivity, with productivity tending to rise until 50-55 and to decline thereafter, but more recent studies, particularly in the US, have challenged this theory.
So, it is hard to draw a solid link between productivity and age, given the numerous factors involved, such as sector of activity, workplace conditions, training levels, motivation, use of technologies, etc. Moreover, as current elderly cohorts have higher educational levels than previous ones, ageing’s impact on productivity should be lower than in the past. Moreover, the age at which capacities begin to diminish has probably also increased, due to seniors’ improved health and life expectancy. Lastly, team members of a variety of ages and age-adapted equipment tend to support productivity. Studies at the macroeconomic level have found that ageing has a negative impact on productivity but quantitatively first (with diminished strength for work), before qualitatively (lower productivity with age).
Robotisation may be one way to keep productivity high
One way to mitigate labour shortages is to substitute capital for labour. This was the case first for low-skilled work but is now also affecting more skilled industrial tasks. The emergence of artificial intelligence (AI) could accentuate this trend, particularly in service activities where robotisation is only marginal for the moment.
In its 2023 annual report, the International Federation of Robotics reported that robotisation of economies had accelerated worldwide since 2021, with more than 500,000 new manufacturing robots installed each year and a steep increase expected for the coming years.
Robotisation is enhancing productivity but can also enhance security and make certain tasks less arduous, such as handling heavy loads, automating hard and repetitive tasks, etc… The auto sector was one of the first to use robotisation but now many other sectors are doing so, including electricity-electronics, metallurgy, chemicals and agro-food.
Robotic density is positively and significantly correlated to the ageing of the future working population active. Asia accounts for almost 80% of new installations, of which more than half in China, followed by Japan and Korea. The second-largest market is Europe, with almost 70,000 new installations in 2023, followed by the US (+56,000 units).
Two researchers, Daron Acemoglu and Pascual Restrepo4, have found that the countries that have aged the most are also those where robotisation is the furthest along. For example, there are far more robots per employee in Japan, Germany and South Korea than in the US. Based on a sample of 60 countries, the researchers found that those countries experiencing the most rapid demographic changes have invested more in new robotisation and automation technologies. Ageing alone accounts for about 35% of the differences between countries in investment in robotics and about 20% of the differences in robot imports. The researchers also found that the fastest-ageing countries file more patent applications in automation than other countries, whereas there is no similar relationship for other types of technology.
Population ageing is already having significant impacts on the labour market in many economies and will do so even more in the coming years. While its consequences are sometimes hard to measure, clearly, population ageing is exacerbating labour shortages in certain sectors, and pressure on retirement systems has led to a convergence of the participation rate of workers aged 55-64 towards the rate of the working population as a whole. This is a powerful motivating factor for continuing robotisation in industry, and the emergence of AI is creating the prospect of a similar trend in those service sectors that lend themselves to it.
1. Live longer, work longer, OCDE – 2006
2. Vieillissement de la population active : Vers une baisse de la productivité ? Sandrine Levasseur. Revue de l'OFCE 2015/6
3. The macroeconomic and fiscal impact of population ageing, ECB Occasional Paper Series N° 296, June 2022
4. Acemoglu D. et P. Restrepo, 2022, « Demographics and automation », Review of Economic Studies, Vol. 89(1), 1-44.