## sipea2023062

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### A. Introduction
- Romania faces demographic challenges: the size of the working-age population is falling while the dependency ratio (working-age persons to young and old persons) is rising, undermining potential output growth and slowing convergence to Western European income levels.
- Labor force participation (LFP) plays a central role in determining Romania’s future economic path and living standards.
- Overall LFP in 2022 was 66.8 percent, the second lowest in the EU, and 9½ percentage points lower than the average of EU countries (excluding Romania).
- The paper analyzes reasons for low LFP and outlines policy options to raise it.

### B. Background: Demographic Challenges
- Fertility and migration:
  - Birth rate below replacement level (replacement level = 2.1 births per woman).
  - Net migration remains negative while most other EU countries have turned positive.
  - In 2022, population increased for the first time in 30 years, likely due to positive net migration from an influx of around 80,000–100,000 Ukrainian refugees and migrants from non-European countries.
  - Work visas issued by authorities rose from 3,000 in 2017 to 100,000 in 2022.
- Working-age population and aging:
  - 2007: working-age population 14.5 million; 21 percent aged 15–24; 16 percent aged 55–64.
  - 2019: working-age population 12.2 million; 16 percent aged 15–24; 18 percent aged 55–64.
  - An ageing labor force could reduce productivity growth; estimated TFP growth reduction of 0.4 percentage points annually between 2020 and 2050.
- Dependency ratio and fiscal implications:
  - In 2022, for each person aged 65 and over there were 3.3 working-age persons, down from 4.6 in 2007.
  - Projected ratio for 2050 is 2.0.
  - IMF (2019) estimates deficit-to-GDP ratio will increase by 3¾ percentage points by 2050; current replacement rate of pensions about 33 percent.

### C. Labor Force Participation: Overview and Drivers
- Measurement and aggregation nuances:
  - Romania’s 2022 overall LFP was 66.8 percent; semi-subsistence agricultural workers are not counted in Eurostat’s labor force measure—Romania’s agricultural employment share is 21 percent.
  - Including semi-subsistence agricultural workers raises Romania’s LFP to around 72 percent, still below most peers.
  - Total hours worked by the working-age population are close to the EU average but relatively low compared to EU CESEE peers.
- Cross-border work and commuting:
  - Estimates suggest 3–5 million Romanians—21 percent of the population—may work abroad, affecting measured LFP.
  - Bulgaria, with similar agricultural employment (17 percent) and similar share working abroad (~23 percent), reports LFP of 74 percent versus Romania’s 67 percent.
- Group-level LFP patterns and simulation of potential gains:
  - Romania’s LFP is relatively low across almost all population groups by gender, education, and age, with exceptions for prime-aged men (25–54) and middle-aged women with tertiary education.
  - If LFP of all gender/age/education groups matched EU14 levels, Romania’s labor force would be higher by 1,000 thousand (1 million); the increase in women’s LFP accounts for the bulk of this increase.
    - Potential Labor Force Gain (if LFP were at EU14 levels, 2022, thousand persons):
      - By gender: Women 752; Men 257; Total 1,010.
      - By education:
        - Primary and lower sec (0-2): 240
        - Upper secondary (3-4): 513
        - Tertiary (5-8): 0
      - By age:
        - 15–24 years: 208
        - 25–54 years: 323
        - 55–64 years: 221
    - Potential Labor Force Gain (Percent):
      - By gender: Women 74.5; Men 25.5; Total 100.0
      - By education:
        - Primary and lower sec. (0-2): 23.7/1.3/25.0
        - Upper secondary (3-4): 50.8/23.9/74.7
        - Tertiary (5-8): 0.0/0.3/0.3
      - By age:
        - 15–24 years: 20.6/15.3/36.0
        - 25–54 years: 32.0/–0.3/31.7
        - 55–64 years: 21.9/10.4/32.3

### Women’s Labor Force Participation: Factors and Evidence
- Gender gap:
  - Romania’s LFP gender gap is the largest in the EU.
  - Women account for three-quarters of the difference in LFP with other EU countries.
- Financial incentives and retirement ages:
  - Limited role of pay discrimination: unadjusted gender pay gap across all education levels is 2.1 percent (2018 figure), the second-lowest in the EU (data reliability caveat noted).
  - Statutory retirement ages differ: women 61¾ years (rising to 63 years by 2030) vs. men 65 years—this may help explain low LFP for women age 55–64.
  - The total number of pensioners relative to those aged 65 and over is not particularly high in Romania compared to other EU countries, implying eligibility for pensions before 65 is not the key driver of low older-age LFP.
- Care responsibilities and childcare:
  - Low participation of children age 3 to school entry in formal childcare in Romania.
  - Childcare availability is a determinant of female LFP; effects stronger for women with lower education.
  - Women perform the bulk of old-age care; insufficiency of formal elderly care could reduce female LFP in an ageing society.
- Inequality and labor market protection:
  - Higher income inequality correlates with lower female LFP; Romania’s relatively high inequality may contribute.
  - Gender wage gap larger for women with tertiary education; yet LFP of women with tertiary education is similar to men and slightly above EU average, suggesting barriers concentrated among lower-educated women.

### Education and Youth LFP
- Education as determinant:
  - LFP rises with education; people with tertiary education in Romania have LFP similar to other EU countries.
  - Lower share of people with higher education in Romania explains about 2 percentage points of the overall LFP gap.
- Quality of education:
  - Romania has one of the highest rates of low achievers at age 15 in mathematics, science, and reading in the EU.
  - Low performance correlates with low LFP for level 3–4 education (upper secondary) but not for level 0–2 education.
  - Low employability and higher unemployment among level 3–4 graduates may discourage workforce entry; less qualified workers are more likely to work abroad seasonally, reducing measured domestic LFP.
- Policy response:
  - Authorities have increased work visas for non-EU nationals to alleviate low-skilled labor shortages.

### Age and Other Drivers
- Age effects:
  - LFP of people aged 55–64 is lower than in peers, especially for women.
  - One explanation: women's retirement age is lower than men's—61¾ years, rising to 63 years by 2030 vs. 65 years for men.
  - Disability and life expectancy do not seem correlated with LFP; the number of disability pensioners in Romania is low.
- Unemployment link:
  - Prior literature finds a robust inverse relationship between overall unemployment rates and LFP in time-series country analyses; cross-country impact on total LFP is low but strong for the young.

### Aggregate Importance and Fiscal Effects of Raising LFP
- Aggregate macro effects:
  - Closing the LFP rate gap of 9½ percentage points to the EU average would increase the labor force by about 14½ percent, and increase GDP by about 6½ percent.
  - Part of the increase may reflect movement from the informal sector and/or semi-subsistence agriculture to the formal and/or non-agricultural sector, implying a shift from relatively low-productivity to higher-productivity activities and a significant boost in aggregate productivity.
  - Increase in labor force should be gradual to avoid rising unemployment; the declining working-age population should minimize labor market friction from new entrants.
- Fiscal implications:
  - Closing the LFP gap could improve the fiscal deficit by around 2 percentage points of GDP, even taking into account the increase in GDP.
  - Revenues from income and social security taxes would rise by close to 1 percentage point of GDP.
  - Higher GDP would reduce total spending as a share of GDP by around 1¼ percentage points.
  - Offsetting pressure: pensions are set to increase based on a formula tied to inflation and wages; rising GDP per capita is likely to lead to pressures to raise pensions—which are, compared to other European countries, already very low.

### Policy Recommendations to Boost LFP, Especially Female Participation
- Prioritize affordable high-quality childcare to:
  - Help women with lower levels of education (whose opportunity cost of staying at home is lower).
  - Increase intergenerational mobility by improving opportunities of poorer children and/or children of poorer and less educated parents.
- Expand availability of flexible working-time arrangements, including part-time work.
- Improve quality of education at all levels:
  - Romania’s share of low achievers in mathematics, science, and reading is among the highest in the EU; Romania scored well below the OECD and EU averages in PISA (OECD 2018).
  - Differences in performance across socio-economic groups were above the OECD average and have widened since the previous assessment.
  - School principals reported fewer staff and more material shortages than the OECD average.
- Increase education spending combined with targeted reforms:
  - Additional expenditure of almost 2 percent of GDP would be required to bring education spending to the EU average of 5 percent of GDP.
  - Given the current fiscal situation, higher spending would require higher revenues—above those needed to reduce the deficit with current spending allocations.

*Source: IMF staff analysis (sipea2023062).*

### References ____________________________________________________________________________ 12

### sipea2023062 - References ____________________________________________________________________________ 12

### A. Introduction
- Romania faces demographic challenges: the size of the working-age population is falling while the dependency ratio (working-age persons to young and old persons) is rising, undermining potential output growth and slowing convergence to Western European income levels.
- Labor force participation (LFP) plays a central role in determining Romania’s future economic path and living standards.
- Overall LFP in 2022 was 66.8 percent, the second lowest in the EU, and 9½ percentage points lower than the average of EU countries (excluding Romania).
- The paper analyzes reasons for low LFP and outlines policy options to raise it; Sections: B (demographics), C (LFP across demographic groups and causes), D (policy options and simulations).

### B. Background: Demographic Challenges
- Romania’s birth rate is below replacement level (replacement level = 2.1 births per woman), and net outmigration (mostly working age) continues, though at a slower pace than earlier.
- Net migration and fertility context:
  - Net migration remains negative while most other EU countries have turned positive.
  - In 2022, population increased for the first time in 30 years, likely due to positive net migration from an influx of around 80,000–100,000 Ukrainian refugees and migrants from non-European countries.
  - Work visas issued by authorities rose from 3,000 in 2017 to 100,000 in 2022 (The Economist 2023a).
- Working-age population and aging:
  - 2007: working-age population 14.5 million; 21 percent aged 15–24; 16 percent aged 55–64.
  - 2019: working-age population 12.2 million; 16 percent aged 15–24; 18 percent aged 55–64.
  - An ageing labor force could reduce productivity growth; estimated TFP growth reduction of 0.4 percentage points annually between 2020 and 2050 (IMF 2019).
- Dependency ratio and fiscal implications:
  - In 2022, for each person aged 65 and over there were 3.3 working-age persons, down from 4.6 in 2007.
  - Projected ratio for 2050 is 2.0.
  - IMF (2019) estimates deficit-to-GDP ratio will increase by 3¾ percentage points by 2050; current replacement rate of pensions about 33 percent.

### C. Labor Force Participation: Overview and Drivers
- LFP levels and measurement nuances:
  - Romania’s 2022 overall LFP was 66.8 percent; semi-subsistence agricultural workers are not counted in Eurostat’s labor force measure—Romania’s agricultural employment share is 21 percent.
  - Including semi-subsistence agricultural workers raises Romania’s LFP to around 72 percent, still below most peers.
  - Total hours worked by the working-age population are close to the EU average but relatively low compared to EU CESEE peers.
- Cross-border work and commuting:
  - Estimates suggest 3–5 million Romanians—21 percent of the population—may work abroad (Paul, 2020), affecting measured LFP.
  - Bulgaria, with similar agricultural employment (17 percent) and similar share working abroad (~23 percent), reports LFP of 74 percent versus Romania’s 67 percent.
- Group-level LFP patterns:
  - Romania’s LFP is relatively low across almost all population groups by gender, education, and age.
  - Exceptions: prime-aged men (ages 25–54) of all education levels and middle-aged women with tertiary education have LFP rates comparable to EU14 levels.
- Simulation of potential gains:
  - If LFP of all gender/age/education groups matched EU14 levels, Romania’s labor force would be higher by 1 million; the increase in women’s LFP accounts for the bulk of this increase.
  - Romania: Potential Labor Force Gain (if LFP were at EU14 levels, 2022, thousand persons)
    - By gender: Women 752; Men 257; Total 1,010.
    - By education:
      - Primary and lower sec (0-2): 240
      - Upper secondary (3-4): 513
      - Tertiary (5-8): 0
    - By age:
      - 15–24 years: 208
      - 25–54 years: 323
      - 55–64 years: 221
    - Potential Labor Force Gain (Percent)
      - By gender: Women 74.5; Men 25.5; Total 100.0
      - By education:
        - Primary and lower sec. (0-2): 23.7/1.3/25.0
        - Upper secondary (3-4): 50.8/23.9/74.7
        - Tertiary (5-8): 0.0/0.3/0.3
      - By age:
        - 15–24 years: 20.6/15.3/36.0
        - 25–54 years: 32.0/–0.3/31.7
        - 55–64 years: 21.9/10.4/32.3

### Women’s Labor Force Participation: Factors and Evidence
- Gender gap:
  - Romania’s LFP gender gap is the largest in the EU.
- Financial incentives:
  - Limited role: flat income tax, no joint filing of spouses; Romania’s unadjusted gender pay gap across all education levels is the second-lowest in the EU (2018 figure for all education levels = 2.1 percent), suggesting low contribution of pay gap to low female LFP (data reliability caveat noted).
  - Statutory retirement ages differ: women 61¾ years vs. men 65 years—may explain low LFP for women age 55–64.
- Childcare and care responsibilities:
  - Low participation of children age 3 to school entry in formal childcare in Romania.
  - Evidence suggests childcare availability is a determinant of female LFP; effects stronger for women with lower education.
  - Women perform the bulk of old-age care; formal elderly care insufficiency could reduce female LFP in an ageing society.
- Inequality and labor market protection:
  - Higher income inequality correlates with lower female LFP; Romania’s relatively high inequality may contribute to low female LFP.
  - Gender wage gap larger for women with tertiary education; LFP of women with tertiary education similar to men and slightly above EU average, suggesting barriers are concentrated among lower-educated women.

### Education and Youth LFP
- Education as determinant:
  - LFP rises with education; people with tertiary education in Romania have LFP similar to other EU countries.
  - Lower share of people with higher education in Romania explains about 2 percentage points of the overall LFP gap.
- Quality of education:
  - Romania has one of the highest rates of low achievers at age 15 in mathematics, science, and reading in the EU.
  - This low performance correlates with low LFP for level 3–4 education (upper secondary) but not for level 0–2 education.
  - Low employability and higher unemployment among level 3–4 graduates may discourage workforce entry; less qualified workers are more likely to work abroad seasonally, reducing measured domestic LFP.
- Policy response noted:
  - Authorities have increased work visas for non-EU nationals to alleviate low-skilled labor shortages.

*Source: IMF staff analysis (content unit sipea2023062 - References ____________________________________________________________________________ 12).*

### 20.      Age appears to more adversely affect LFP in Romania compared to peers, but the

### 20.      Age appears to more adversely affect LFP in Romania compared to peers, but the

### Age and labor force participation (LFP)
- LFP of people aged 55–64 is lower than in peers, especially for women.
- One possible explanation: women's retirement age is lower than men's—"61¾ years, rising to 63 years by 2030 vs. 65 years for men."
- The total number of pensioners relative to those aged 65 and over—an indication of the prevalence of early retirement or disability pensions—is "not particularly high in Romania when compared to other EU countries."
- Implication: eligibility for pensions before age 65 does not seem to be the key driver for low LFP among older people.

### Other potential drivers and empirical context
- Disability and life expectancy do not seem to be correlated with LFP; number of disability pensioners in Romania is low.
- Prior literature: Ö sterholm (2010) and Jamie (2011) find a robust inverse relationship between overall unemployment rates and LFP in time-series country analyses; in cross-country analysis the impact of total unemployment on total LFP is low but remains strong for the young.

### Aggregate importance of raising LFP
- Closing the LFP rate gap of "9½ percentage points" to the EU average would:
  - increase the labor force by about "14½ percent", and
  - increase GDP by about "6½ percent".
- Transition considerations:
  - Part of the increase may reflect movement from the informal sector and/or semi-subsistence agriculture to the formal and/or non-agricultural sector.
  - Shift from relatively low-productivity to higher-productivity activities would imply a significant boost in aggregate productivity.
  - The increase in labor force should be gradual to avoid rising unemployment; the declining working-age population should minimize labor market friction from new entrants.

### Fiscal effects of higher LFP
- Closing the LFP gap could improve the fiscal deficit by around "2 percentage points of GDP", even taking into account the increase in GDP.
- Revenue and spending composition effects:
  - Revenues from income and social security taxes would rise by close to "1 percentage point of GDP".
  - Higher GDP would reduce total spending as a share of GDP by around "1¼ percentage points".
- Offsetting pressure:
  - Pensions are set to increase based on a formula tied to inflation and wages; rising GDP per capita is likely to lead to pressures to raise pensions—which are, compared to other European countries, already very low.

### Gender gap and targeted gains from female LFP
- Women account for "three-quarters of the difference in LFP with other EU countries."
- Raising women's LFP would have the largest effect on overall LFP and could help reduce inequality and poverty.

### Policy recommendations to boost LFP, especially female participation
- Prioritize affordable high-quality childcare to:
  - Help women with lower levels of education (whose opportunity cost of staying at home is lower).
  - Increase intergenerational mobility by improving opportunities of poorer children and/or children of poorer and less educated parents.
- Expand availability of flexible working-time arrangements, including part-time work.
- Improve quality of education at all levels:
  - Romania’s share of low achievers in mathematics, science, and reading is among the highest in the EU; Romania scored well below the OECD and EU averages in PISA (OECD 2018).
  - Differences in performance across socio-economic groups were above the OECD average and have widened since the previous assessment.
  - School principals reported fewer staff and more material shortages than the OECD average.
- Increase education spending combined with targeted reforms:
  - Additional expenditure of almost "2 percent of GDP" would be required to bring education spending to the EU average of "5 percent of GDP".
  - Given the current fiscal situation, higher spending would require higher revenues—above those needed to reduce the deficit with current spending allocations.

*Source: IMF staff analysis (sipea2023062).*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2023/english/sipea2023062.pdf_