## Change in Population in North Macedonia and the Western Balkan Countries

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---

### Introduction and overview
- The population of North Macedonia has been steadily declining over the past two decades and is projected to continue to decline into the medium term largely because of emigration.
- The 2021 population census revised the population down by around 11 percent relative to its previously estimated values.
- The UN World Population Prospects (2024 Revision) projects the population of North Macedonia to decline by around 4 percent by 2030.
- Estimates by the statistics office of North Macedonia (SSO) project the population to decline by almost 9 percent by 2030.
- Staff estimates that the population decline would create a drag on output growth of around 0.5 percentage points.
- Increased emigration associated with further EU integration presents a downside risk to the outlook; negative impacts from increased emigration can be offset by increasing productivity.

### Projecting future potential output (production-function approach)
- Production function used: Y_t = A_t K_t^{α_t} L_t^{1−α_t}, and output per capita expressed as:
  - Y_t / N_t = A_t^{1/(1−α_t)} (K_t / Y_t)^{α_t/(1−α_t)} (L_t / N_t).
- Capital
  - Constructed with the perpetual inventory method K_t = (1−δ_t) K_{t−1} + X_t.
  - Initial capital K_0 = X_0 / (ḡ_X + δ_0), where ḡ_X is the average growth rate of gross fixed capital formation.
  - Capital projected to 2030 using IMF WEO values; beyond 2030 the capital-output ratio is assumed constant (steady-state), implying a sharp drop in capital and output growth in 2031 (indicative of long-term growth potential rather than year-by-year projection).
- Labor
  - Labor constructed from employment trends and projected as the sum of labor by age and sex sub-groups using UN World Population Prospects Medium Forecast scenario.
  - Total labor stock: L_t = Σ_{a,s} LPR_{a,s,t} × (1−u_{a,s,t}) × N_{a,s,t}.
  - Participation and unemployment projected via convergence:
    - LPR_{a,s,t} = (1−ξ_{a,s}^L) LPR_{a,s,t−1} + ξ_{a,s}^L LPR̄_{a,s}
    - u_{a,s,t} = (1−ξ_{a,s}^u) u_{a,s,t−1} + ξ_{a,s}^u ū_{a,s}
    - Long-run steady states LPR̄_{a,s} and ū_{a,s} taken as EU average values in 2023.
    - Convergence rate parameter ξ_{a,s}^X set to 2.5 percent based on historical pre-pandemic convergence of labor participation rates.
- Total factor productivity (TFP)
  - Constructed as Solow residual A_t = Y_t / (K_t^{α_t} L_t^{1−α_t}).
  - TFP follows IMF WEO values until 2030; thereafter g_t^A = (1−ξ_A) g_{t−1}^A + ξ_A ḡ_A with ξ_A = 2.5 percent and ḡ_A = 1 percent.

### Projection results and key mechanisms
- Despite convergence of participation and unemployment rates toward EU averages, population dynamics dominate:
  - Employment becomes a drag on output growth of around - 0.5 percentage points by 2030.
  - The model compensates partially with higher TFP growth over the projection horizon.
  - Capital deepening is a relatively small component of growth over the horizon.
- Quantitative labor-market and population facts
  - Labor participation rate in North Macedonia around 65 percent versus 75 percent in the EU.
  - Unemployment rate fell from about 26 percent to 13 percent over the past decade; it remains around twice as high as in the EU.
  - Projection: employment will create around a - 0.5 percentage point drag on growth by 2030.

### Comparison of labor markets in the Western Balkans
- North Macedonia has lagged regional peers in improving labor market outcomes; a considerable gap remains with the EU.
- Closing labor market gaps is a significant avenue to offset population-loss effects:
  - Back-of-the-envelope: closing the gap with the EU by increasing participation by around 10 percentage points and lowering unemployment by around 7 percentage points would increase potential output by around 25 percent (≈75%×(1−6%)/65%×(1−13%)−1), implying that closing one-third of the gap would be more than enough to offset the projected loss in population by 2030.
  - Most of the labor participation gap between North Macedonia and the EU is explained by the low labor participation rate of women.

### Gender market gaps — salient figures and implications
- Gender participation and employment gaps (2023)
  - North Macedonia gender labor participation gap ≈ 21 percentage points (p.p.).
  - Western Balkans average gender participation gap = 18.7 p.p.
  - EU average gender participation gap = 8 p.p.
  - Women's employment rates gap = 16 p.p. in North Macedonia.
  - Regional comparators: Kosovo 31 p.p.; Bosnia and Herzegovina 22 p.p.
- Other gender-related statistics
  - 2018 wage gap around 15.3 percent in North Macedonia versus 13 percent in the EU.
- Potential gains from closing gender gaps
  - Employment is projected to decline by around [4 percent] by 2030.
  - Closing the gender gap completely could increase potential output by ΔY_t/N_t ≈ ΔL_t/N_t =14.4%.
  - Closing one-third of the gender gap with the EU could mostly offset the projected employment decline by 2030.
- Drivers of gender gaps cited
  - Inadequate education/skills at lower education levels, caregiving burdens (lack of affordable quality childcare, parental leave policies, cultural norms), tax burden on secondary earners, sectoral composition, gender wage gaps, and informality.

### Modeling labor markets and migration
- Structural multi-country labor-market model with migration builds on Ayerst and Zhang (2025):
  - Households transition between employment, unemployment, and inactivity and can relocate across countries.
  - Decisions incorporate leisure preferences, search probabilities, wages, bilateral migration costs, and idiosyncratic locational preferences.
  - Firms post vacancies; matches produce revenues split via bargaining.
  - Equilibrium characterizes flows across inactivity, unemployment, employment, and countries given economic factors.
- Estimation and sample
  - Model parameters estimated for 35 European countries (EU countries, six Western Balkan countries, Türkiye, and Switzerland) over 2011 to 2019.
  - Model matches transitions between inactivity, unemployment, employment, labor-market tightness (vacancy rate / unemployment rate), net PPP-adjusted wage rate, and bilateral migration flows.
  - Bilateral migration costs set to replicate observed migration patterns.

### Simulated EU-integration scenarios and key findings
- Two EU-integration scenarios simulated
  1. Migration-cost-only scenario
     - Reduction in migration costs between North Macedonia and EU countries.
     - Reduction calibrated to match a doubling of the emigration rate, consistent with empirical evidence in Ayerst et al. (2025) between EU member countries.
  2. Migration + productivity scenario
     - Reduction in migration costs plus an increase in labor productivity.
     - Productivity increase calibrated to match an increase in output-per-capita of around 30 percent, consistent with evidence in IMF (2024).
- Key qualitative finding
  - Negative impacts of further EU integration from increased emigration can be offset by increasing productivity.
  - Productivity-increasing structural reforms, active labor market policies, new business support, and labor participation support can boost potential output and help offset negative migration impacts.

### Simulation results: impact of lower migration costs and productivity improvements
- Without productivity improvements, a reduction in migration costs leads to:
  - A decline in wages and output-per-capita.
  - Worsening labor market outcomes (labor participation, employment, unemployment).
  - A decline in population from increased emigration.
- Mechanism
  - Lower migration costs increase competition from foreign firms, creating a higher wage range at the cost of profits.
  - Lower profits reduce firms’ willingness to post vacancies, raising unemployment.
- Role of productivity improvements
  - Increasing productivity raises both wages and profits for workers and firms.
  - Higher wages and profits incentivize labor participation and vacancy creation.
  - This creates pull factors: unemployed workers find employment more readily and employed workers receive higher wages, which disincentivizes emigration and can incentivize immigration.
  - Net impact in simulations: population is relatively unchanged while output-per-capita increases.
  - Productivity may not fully offset the increase in emigration but can lead to increased immigration and labor market performance that offset negative impacts on output-per-capita.

### Policy experiments modeled
- Four broad policy classes simulated to boost potential output and support the labor market
  - Structural reforms
    - Modeled as a one percent increase in the production of matched firms and workers.
    - Practical examples: reduced misallocation of factors of production (reducing financial constraints), increased investment by firms driven by improved rule of law and reduced corruption, reduced competition from the informal sector.
  - Active labor market policies (ALMP)
    - Modeled as a 10 percent increase in the matching rate between unemployed workers and vacancies, all else equal.
    - Practical examples: job search assistance programs, vocational training, lifelong learning, youth training and apprenticeship programs.
  - Business support (SME)
    - Modeled as a 10 percent reduction in the vacancy cost of new firms entering the market.
    - Practical examples: reducing bureaucratic barriers to firm entry (one-stop shops for business registration), improving access to digital public services.
  - Labor participation (LP)
    - Modeled as a 10 percent reduction in the benefits from inactivity, increasing the relative value of working.
    - Practical examples: increasing access to quality child and elder care, improving access to flexible work arrangements, programs to help out-of-the-labor-force individuals acquire skills to reenter the labor market.
    - Model limitation note: "The policy simulation reduces home production benefits to inactive and unemployed workers, which are valuable to the individuals living in the country. Due to model limitations, this leads to some counter-intuitive results with emigration for this experiment."
- Simulated outcomes and comparisons
  - The policy experiments show policymakers have a range of options to support the economy, all with broadly similar impacts on key outcomes.
  - Policies target different stages of the labor market (participation, job finding, productivity of the match) but produce similar macroeconomic impacts.
  - Policymakers should prioritize policies with the largest potential impact relative to implementation cost and combine policies with monitoring and updating to maintain effectiveness and efficiency.

### Conclusions and policy discussion
- Demographic risk and potential output
  - A declining population, driven by emigration, threatens to reduce potential output growth.
  - Based on UN projections, higher emigration is projected to lead to a decline in the working-age population and is expected to shrink employment by around 0.5 percentage points going into the future.
  - Without counteracting measures, the decline in employment is projected to drive a similar decline in potential output.
- Structural barriers identified
  - Large structural barriers in:
    - Productivity of workers.
    - Matching efficiency between workers and firms.
    - Cost of creating new vacancies in North Macedonia compared to European countries.
  - Policies targeting these areas could lift labor-market quality and boost potential output.
- Gender gap and employment implications
  - The gender gap in North Macedonia is around 21 percentage points.
  - Comparison benchmarks: 18.7 in the Western Balkan countries and 8 in the EU.
  - Closing the gender gap with the other Western Balkan countries by 2030 would offset most of the projected loss in employment from emigration.
  - Closing the gender gap with the EU would offset the loss in employment projected up to 2050.
  - Policy examples to reduce the gender gap: increasing access to affordable childcare, improving education investment in women, aligning parental leave policies with EU standards (including introducing mandatory paternity leave), removing tax disincentives for multi-income households.
- Policy-relevant implications (summary)
  - Addressing population decline requires a mix of policies:
    - Policies that raise productivity (structural reforms, FDI/trade facilitation) can offset emigration-induced output losses.
    - Policies to close labor market gaps—especially gender participation gaps—have large potential gains (e.g., childcare, parental leave, tax treatment of secondary earners, training and reallocation toward sectors with higher female employment).
    - Active labor market policies and support for entrepreneurship and new businesses can mitigate the loss of human capital from emigration.
  - Monitoring and policy calibration should account for downside risks from further emigration if EU integration lowers migration costs without accompanying productivity gains.

*Source — Republic of North Macedonia: Selected Issues paper "Population dynamics, labor market integration, and migration" (April 8, 2025); IMF staff calculations; sipea2025064.*

### 1. Change in Population in North Macedonia and the Western Balkan Countries _______ 2

### 1. Change in Population in North Macedonia and the Western Balkan Countries

### Introduction and overview
- The population of North Macedonia has been steadily declining over the past two decades and is projected to continue to decline into the medium term largely because of emigration.
- The 2021 population census revised the population down by around 11 percent relative to its previously estimated values.
- The UN World Population Prospects (2024 Revision) projects the population of North Macedonia to decline by around 4 percent by 2030.
- Estimates by the statistics office of North Macedonia (SSO) project the population to decline by almost 9 percent by 2030.
- Staff estimates that the population decline would create a drag on output growth of around 0.5 percentage points.
- Increased emigration associated with further EU integration presents a downside risk to the outlook; negative impacts from increased emigration can be offset by increasing productivity.

### Projecting future potential output (production-function approach)
- Production function used: Y_t = A_t K_t^{α_t} L_t^{1−α_t}, and output per capita expressed as:
  - Y_t / N_t = A_t^{1/(1−α_t)} (K_t / Y_t)^{α_t/(1−α_t)} (L_t / N_t).
- Capital:
  - Constructed with the perpetual inventory method K_t = (1−δ_t) K_{t−1} + X_t.
  - Initial capital K_0 = X_0 / (ḡ_X + δ_0), where ḡ_X is the average growth rate of gross fixed capital formation.
  - Capital projected to 2030 using IMF WEO values; beyond 2030 the capital-output ratio is assumed constant (steady-state), implying a sharp drop in capital and output growth in 2031 (indicative of long-term growth potential rather than year-by-year projection).
- Labor:
  - Labor constructed from employment trends and projected as the sum of labor by age and sex sub-groups using UN World Population Prospects Medium Forecast scenario.
  - Total labor stock: L_t = Σ_{a,s} LPR_{a,s,t} × (1−u_{a,s,t}) × N_{a,s,t}.
  - Participation and unemployment projected via convergence:
    - LPR_{a,s,t} = (1−ξ_{a,s}^L) LPR_{a,s,t−1} + ξ_{a,s}^L LPR̄_{a,s}
    - u_{a,s,t} = (1−ξ_{a,s}^u) u_{a,s,t−1} + ξ_{a,s}^u ū_{a,s}
    - Long-run steady states LPR̄_{a,s} and ū_{a,s} taken as EU average values in 2023.
    - Convergence rate parameter ξ_{a,s}^X set to 2.5 percent based on historical pre-pandemic convergence of labor participation rates.
- Total factor productivity (TFP):
  - Constructed as Solow residual A_t = Y_t / (K_t^{α_t} L_t^{1−α_t}).
  - TFP follows IMF WEO values until 2030; thereafter g_t^A = (1−ξ_A) g_{t−1}^A + ξ_A ḡ_A with ξ_A = 2.5 percent and ḡ_A = 1 percent.

### Projection results and key mechanisms
- Despite convergence of participation and unemployment rates toward EU averages, population dynamics dominate:
  - Employment becomes a drag on output growth of around - 0.5 percentage points by 2030.
  - The model compensates partially with higher TFP growth over the projection horizon.
  - Capital deepening is a relatively small component of growth over the horizon.
- Quantitative labor-market and population facts:
  - Labor participation rate in North Macedonia around 65 percent versus 75 percent in the EU.
  - Unemployment rate fell from about 26 percent to 13 percent over the past decade; it remains around twice as high as in the EU.
  - Projection: employment will create around a - 0.5 percentage point drag on growth by 2030.

### Comparison of labor markets in the Western Balkans
- North Macedonia has lagged regional peers in improving labor market outcomes; a considerable gap remains with the EU.
- Closing labor market gaps is a significant avenue to offset population-loss effects:
  - Back-of-the-envelope: closing the gap with the EU by increasing participation by around 10 percentage points and lowering unemployment by around 7 percentage points would increase potential output by around 25 percent (≈75%×(1−6%)/65%×(1−13%)−1), implying that closing one-third of the gap would be more than enough to offset the projected loss in population by 2030.
  - Most of the labor participation gap between North Macedonia and the EU is explained by the low labor participation rate of women.

### Gender market gaps (Box 1) — salient figures and implications
- Gender participation and employment gaps (2023):
  - North Macedonia gender labor participation gap ≈ 21 percentage points (p.p.).
  - Western Balkans average gender participation gap = 18.7 p.p.
  - EU average gender participation gap = 8 p.p.
  - Women's employment rates gap = 16 p.p. in North Macedonia.
  - Regional comparators: Kosovo 31 p.p.; Bosnia and Herzegovina 22 p.p.
- Other gender-related statistics:
  - 2018 wage gap around 15.3 percent in North Macedonia versus 13 percent in the EU.
- Potential gains from closing gender gaps:
  - Employment is projected to decline by around [4 percent] by 2030 (brackets preserved from source).
  - Closing the gender gap completely could increase potential output by ΔY_t/N_t ≈ ΔL_t/N_t =14.4%.
  - Closing one-third of the gender gap with the EU could mostly offset the projected employment decline by 2030.
- Drivers of gender gaps cited: inadequate education/skills at lower education levels, caregiving burdens (lack of affordable quality childcare, parental leave policies, cultural norms), tax burden on secondary earners, sectoral composition, gender wage gaps, and informality.

### Modeling labor markets and migration
- Structural multi-country labor-market model with migration builds on Ayerst and Zhang (2025):
  - Households transition between employment, unemployment, and inactivity and can relocate across countries.
  - Decisions incorporate leisure preferences, search probabilities, wages, bilateral migration costs, and idiosyncratic locational preferences.
  - Firms post vacancies; matches produce revenues split via bargaining.
  - Equilibrium characterizes flows across inactivity, unemployment, employment, and countries given economic factors.
- Estimation and sample:
  - Model parameters estimated for 35 European countries (EU countries, six Western Balkan countries, Türkiye, and Switzerland) over 2011 to 2019.
  - Model matches transitions between inactivity, unemployment, employment, labor-market tightness (vacancy rate / unemployment rate), net PPP-adjusted wage rate, and bilateral migration flows.
  - Bilateral migration costs set to replicate observed migration patterns.

### Simulated impact of further EU integration and policy scenarios
- Two EU-integration scenarios simulated:
  1. Reduction in migration costs between North Macedonia and EU countries (migration-cost-only scenario).
     - Reduction calibrated to match a doubling of the emigration rate, consistent with empirical evidence in Ayerst et al. (2025) between EU member countries.
  2. Reduction in migration costs plus an increase in labor productivity (migration + productivity scenario).
     - Productivity increase calibrated to match an increase in output-per-capita of around 30 percent, consistent with evidence in IMF (2024).
- Key qualitative finding:
  - Negative impacts of further EU integration from increased emigration can be offset by increasing productivity.
  - Productivity-increasing structural reforms, active labor market policies, new business support, and labor participation support can boost potential output and help offset negative migration impacts.

### Policy-relevant implications (drawn from analysis)
- Addressing population decline requires a mix of policies:
  - Policies that raise productivity (structural reforms, FDI/trade facilitation) can offset emigration-induced output losses.
  - Policies to close labor market gaps—especially gender participation gaps—have large potential gains (e.g., childcare, parental leave, tax treatment of secondary earners, training and reallocation toward sectors with higher female employment).
  - Active labor market policies and support for entrepreneurship and new businesses can mitigate the loss of human capital from emigration.
- Monitoring and policy calibration should account for downside risks from further emigration if EU integration lowers migration costs without accompanying productivity gains.

*Italic: Source — Republic of North Macedonia: Selected Issues paper "Population dynamics, labor market integration, and migration" (April 8, 2025).*

### 12.      The simulations highlight that productivity improvements are necessary to offset the

### 12.      The simulations highlight that productivity improvements are necessary to offset the

### Simulation results: impact of lower migration costs and productivity improvements
- Without productivity improvements, a reduction in migration costs leads to:
  - A decline in wages and output-per-capita.
  - Worsening labor market outcomes (labor participation, employment, unemployment).
  - A decline in population from increased emigration.
- Mechanism:
  - Lower migration costs increase competition from foreign firms, creating a higher wage range at the cost of profits.
  - Lower profits reduce firms’ willingness to post vacancies, raising unemployment.
- Role of productivity improvements:
  - Increasing productivity raises both wages and profits for workers and firms.
  - Higher wages and profits incentivize labor participation and vacancy creation.
  - This creates pull factors: unemployed workers find employment more readily and employed workers receive higher wages, which disincentivizes emigration and can incentivize immigration.
  - Net impact in simulations: population is relatively unchanged while output-per-capita increases.
  - Productivity may not fully offset the increase in emigration but can lead to increased immigration and labor market performance that offset negative impacts on output-per-capita.

### Policy experiments modeled
- Four broad policy classes simulated to boost potential output and support the labor market:
  - Structural reforms
    - Modeled as a one percent increase in the production of matched firms and workers.
    - Practical examples: reduced misallocation of factors of production (reducing financial constraints), increased investment by firms driven by improved rule of law and reduced corruption, reduced competition from the informal sector.
  - Active labor market policies (ALMP)
    - Modeled as a 10 percent increase in the matching rate between unemployed workers and vacancies, all else equal.
    - Practical examples: job search assistance programs, vocational training, lifelong learning, youth training and apprenticeship programs.
  - Business support (SME)
    - Modeled as a 10 percent reduction in the vacancy cost of new firms entering the market.
    - Practical examples: reducing bureaucratic barriers to firm entry (one-stop shops for business registration), improving access to digital public services.
  - Labor participation (LP)
    - Modeled as a 10 percent reduction in the benefits from inactivity, increasing the relative value of working.
    - Practical examples: increasing access to quality child and elder care, improving access to flexible work arrangements, programs to help out-of-the-labor-force individuals acquire skills to reenter the labor market.
    - Model limitation note: "The policy simulation reduces home production benefits to inactive and unemployed workers, which are valuable to the individuals living in the country. Due to model limitations, this leads to some counter-intuitive results with emigration for this experiment."

- Simulated outcomes and comparisons:
  - The policy experiments show policymakers have a range of options to support the economy, all with broadly similar impacts on key outcomes.
  - Policies target different stages of the labor market (participation, job finding, productivity of the match) but produce similar macroeconomic impacts.
  - Policymakers should prioritize policies with the largest potential impact relative to implementation cost and combine policies with monitoring and updating to maintain effectiveness and efficiency.

### Conclusions and policy discussion: demographic and labor-market implications
- Demographic risk and potential output:
  - A declining population, driven by emigration, threatens to reduce potential output growth.
  - Based on UN projections, higher emigration is projected to lead to a decline in the working-age population and is expected to shrink employment by around 0.5 percentage points going into the future.
  - Without counteracting measures, the decline in employment is projected to drive a similar decline in potential output.
- Structural barriers identified:
  - Large structural barriers in:
    - Productivity of workers.
    - Matching efficiency between workers and firms.
    - Cost of creating new vacancies in North Macedonia compared to European countries.
  - Policies targeting these areas could lift labor-market quality and boost potential output.

### Gender gap and employment implications
- Current gaps and comparisons:
  - The gender gap in North Macedonia is around 21 percentage points.
  - Comparison benchmarks: 18.7 in the Western Balkan countries and 8 in the EU.
- Impact of closing the gender gap:
  - Closing the gender gap with the other Western Balkan countries by 2030 would offset most of the projected loss in employment from emigration.
  - Closing the gender gap with the EU would offset the loss in employment projected up to 2050.
- Policy examples to reduce the gender gap:
  - Increasing access to affordable childcare.
  - Improving education investment in women.
  - Aligning parental leave policies with EU standards, including introducing mandatory paternity leave.
  - Removing tax disincentives for multi-income households.

*Source: IMF staff calculations; sipea2025064.*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025064.pdf_