## 1. Labor Force and Migration

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**Canonical URL:** [1. Labor Force and Migration](https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025138.pdf)

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---

### Introduction
- Lithuania faces severe demographic pressures driven by a low fertility rate—around 1.5 percent since the 1990s—and significant negative net migration.
- Working age population:
  - Fell from 2.34 million in 1998 to 1.81 million in 2019.
  - Increased to 1.89 million in 2024 due to positive net migration in recent years.
- European Commission projects demographic pressures from low fertility and renewed negative net migration will accelerate over the next decades, decreasing the working age population further.
- The shrinking labor force will have negative implications for Lithuania’s potential growth over the medium and long term.

### Integration of Migrant Workers — Recent Developments and Labor Market Outcomes
- Foreign-born population:
  - Has more than doubled to around 8% from 2022 to 2024.
- Major migrant groups: Ukrainians, Belarusians, and Lithuanians (returnees).
  - Around 70% of Ukrainians are actively participating in the labor market; however, they mostly work low-wage jobs.
  - Citizens of Belarus mostly work in higher value-added sectors and only very rarely in low-skilled activities (Bank of Lithuania, 2024).
- Quotas for non-EU migration (Migration Department data):
  - 2021: Quota 32,200; Share of working age population 1.8%; Quota used 32,200
  - 2022: Quota 35,600; Share of working age population 1.9%; Quota used 35,600
  - 2023: Quota 40,250; Share of working age population 2.2%; Quota used 40,250
  - 2024: Quota 40,250; Share of working age population 2.1%; Quota used 37,933
  - 2025: Quota 24,830; Share of working age population 1.3%; Quota used (blank in source)
  - Notes: Quotas before 2025 were structured with sub-quotas for certain industries; this was abolished in 2025. High-skilled industries that lack workers are excluded from the quotas.
- Integration indicators (2023):
  - Overqualification of non-EU citizens is not particularly high.
  - Employment rates of non-EU citizens are exceptionally high.
  - Non-EU citizens are relatively more often entrepreneurs than nationals.
  - Skills mismatch is relatively high but has come down significantly since net migration picked up in 2020.
- Quotas during recent years have kept non-EU migration at around two percent, contributing to a persistently low foreign-born share of the population.

### Estimation Approach — Production Function and Key Assumptions
- Methodology:
  - Uses a standard Cobb-Douglas production function with constant returns to scale.
  - Potential output decomposition: TFP, capital stock, and labor (hours worked).
  - Labor share is kept constant at its 1995–2023 average value of 51%.
- Capital:
  - Capital inputs until 2030 are aligned with IMF staff forecasts.
  - Capital accumulation equation used: K_{t+1} = I_t + (1−δ) K_{t−1}.
  - Depreciation rate δ kept fixed at its average 2015-2023 level.
  - Growth in the real capital stock is expected to slow from 5.5 percent in 2024 to 4.5 percent in 2030.
- Labor:
  - Labor input defined as hours worked: L_t = Working age population * labor force participation rate * (1 − unemployment rate) * average hours worked per worker.
  - Forecasts for the working age population from Eurostat.
  - Baseline migration scenario: working age population assumed to shrink by 1.1 percent per year.
  - Labor force participation rate and hours worked are kept constant at their 2023 levels.
- TFP:
  - Historically calculated as the Solow residual.
  - Average historical TFP growth around 1.6 percent.
  - TFP growth negative in 2022-2024 due to a terms of trade shock and labor hoarding.
  - Over the medium-term TFP growth is assumed to pick up again to close to 1 percent (the historical average over 2012-2024).
  - Population share aged 60+ increased from 19 percent in 2000 to 28 percent in 2023 and is projected to increase to 31 percent by 2030.

### Scenario Analysis — Migration Paths and Potential Growth Effects
- Trend and contributions:
  - Potential growth has declined over time; capital has contributed most, labor has played a negligible role, and TFP contribution has fallen.
- Baseline demographic projection (European Commission):
  - Decrease in Lithuania’s labor force by around 7 percent from 2025 to 2030, around 1.3 percent per year.
  - With constant participation and a slight increase in hours per worker, labor contributes negatively to potential growth at around −0.7 percent in 2030.
- Eurostat migration scenarios for working age population:
  - Downside (low migration): labor force decreases by 1.5 percent per year.
  - Baseline (medium migration): labor force decreases by 1.1 percent per year.
  - Upside (high migration): labor force decreases by 1.0 percent per year.
  - The average labor force growth rate in the upside migration scenario is similar to a scenario with zero net migration.
- Net migration levels and equivalents:
  - Preventing the labor force from shrinking would require positive net migration of around 20,000 people per year—levels reached in 2020-23.
  - Yearly net migration of around 20,000 is equivalent to around 0.7 percent of the population.
- Cumulative net migration from Eurostat scenarios (working age population net migrants, 2025–2030):
  - Baseline scenario: around −20,000
  - Low migration scenario: around −45,000
  - High migration scenario: around 5,000
  - A no migration scenario (close to the high migration scenario) implies the labor force falls by 6.4 percent from 2025 to 2030.
- Potential growth sensitivity:
  - Potential growth could be 0.2 percent lower in the downside Eurostat migration scenario and 0.2 percent higher in the upside scenario.
  - Sustained migration closer to levels seen in recent years would increase potential growth strongly.
- Additional sensitivity:
  - A decrease in hours worked back to 2022 levels could reduce potential growth by up to 0.2 percent.

### Conclusions and Policy Recommendations
- Key conclusions:
  - Immigration can play a role in mitigating the impact of aging on the labor force and supporting potential output growth.
  - Recent immigrants have been successfully absorbed into the Lithuanian labor market; legislative amendments enabled easier migration for high-skilled non-EU workers despite the reduction of non-EU workers quota in 2025.
  - Given uncertainty about future immigration developments, addressing constraints limiting capital deepening and TFP growth is crucial.
- Policy recommendations:
  - Continue policies that integrate migrants in the most productivity-enhancing way possible.
  - Allow participation of foreign professionals in sectors with the largest shortages, including non-EU migration of lower-skilled workers where it addresses skills mismatches in specific occupations.
  - Address the large skills mismatch between the domestic labor force and vacancies; the right migration flows can partly alleviate this issue.
  - Engage the local population to ensure public support: inform about potential positive spillovers, ensure adequate provision of public services, and compensate potential losers where necessary.

### Uncertainty and key assumptions
- The uncertainty surrounding the scenarios is high, linked to:
  - uncertainty about the assumptions for capital deepening and TFP growth;
  - complexity of possible interactions between all the factors of production.
- The scope for increasing the labor force contribution is likely limited even with migration, making developments in capital intensity and TFP growth particularly important for projecting potential output growth.
- The next SIP will examine driving forces and remaining constraints affecting capital intensity and TFP growth and discuss structural reforms to unlock their full potential.

### Migration scenarios and population projections
- Scenarios presented include:
  - Baseline Scenario
  - Downside Scenario
  - Upside Scenario
  - +0.7% Net Migration Scenario
  - Zero Net Migration (for working-age population projection comparison)
- Lithuania: Net Migration (Percent of total population) is shown across 2015–2030 with immigration and emigration components and a Net Migration Baseline.
- Working Age Population Projections (thousand) are shown historically and across scenarios for 1998, 2001, 2004, 2007, 2010, 2013, 2016, 2019, 2022, 2025, 2028, 2031, 2034 with series: Historical, Zero Net Migration, Baseline, Downside Scenario, Upside Scenario, +0.7% Net Migration Scenario.
- Label: Sources: Eurostat, Lithuania Department of Statistics.

### Potential growth under migration scenarios and contributions
- Potential Growth under Different Migration Scenarios is presented as Percent change year-on-year for 2015–2030 for:
  - Baseline
  - Downside Scenario
  - Upside Scenario
  - +0.7% Net Migration Scenario
- Notes: Potential growth is historically higher in '+0.7%' scenario due to the HP-filter.
- Contributions to potential growth (yearly averages 2025-2030) are decomposed into TFPLaborCapital and aggregate Potential growth.
- Axis range in the chart indicates values from -1 to 5 (Percentage points, yearly averages 2025-2030).
- Sources: Haver, Eurostat, Penn World Tables, IMF staff calculations.

### Implications and next steps
- Because labor force gains from migration are constrained, policy focus should emphasize:
  - understanding and fostering capital deepening;
  - understanding and fostering TFP growth.
- A forthcoming SIP will provide a deeper analysis of driving forces, remaining constraints, and structural reforms to realize potential gains.

*Prepared by Lukas Boer (EUR); International Monetary Fund, July 29, 2025.*

### 1. Labor Force and Migration __________________________________________________________ 3

### 1. Labor Force and Migration

### Introduction
- Lithuania faces severe demographic pressures driven by a low fertility rate—around 1.5 percent since the 1990s—and significant negative net migration.
- Working age population:
  - Fell from 2.34 million in 1998 to 1.81 million in 2019.
  - Increased to 1.89 million in 2024 due to positive net migration in recent years.
- European Commission projects demographic pressures from low fertility and renewed negative net migration will accelerate over the next decades, decreasing the working age population further.
- The shrinking labor force will have negative implications for Lithuania’s potential growth over the medium and long term.

### Integration of Migrant Workers — Recent Developments and Labor Market Outcomes
- Foreign-born population:
  - Has more than doubled to around 8% from 2022 to 2024.
- Major migrant groups: Ukrainians, Belarusians, and Lithuanians (returnees).
  - Around 70% of Ukrainians are actively participating in the labor market; however, they mostly work low-wage jobs.
  - Citizens of Belarus mostly work in higher value-added sectors and only very rarely in low-skilled activities (Bank of Lithuania, 2024).
- Quotas for non-EU migration (Migration Department data):
  - 2021: Quota 32,200; Share of working age population 1.8%; Quota used 32,200
  - 2022: Quota 35,600; Share of working age population 1.9%; Quota used 35,600
  - 2023: Quota 40,250; Share of working age population 2.2%; Quota used 40,250
  - 2024: Quota 40,250; Share of working age population 2.1%; Quota used 37,933
  - 2025: Quota 24,830; Share of working age population 1.3%; Quota used (blank in source)
  - Notes: Quotas before 2025 were structured with sub-quotas for certain industries; this was abolished in 2025. High-skilled industries that lack workers are excluded from the quotas.
- Integration indicators (2023):
  - Overqualification of non-EU citizens is not particularly high.
  - Employment rates of non-EU citizens are exceptionally high.
  - Non-EU citizens are relatively more often entrepreneurs than nationals.
  - Skills mismatch is relatively high but has come down significantly since net migration picked up in 2020.
- Quotas during recent years have kept non-EU migration at around two percent, contributing to a persistently low foreign-born share of the population.

### Estimation Approach — Production Function and Key Assumptions
- Methodology:
  - Uses a standard Cobb-Douglas production function with constant returns to scale.
  - Potential output decomposition: TFP, capital stock, and labor (hours worked).
  - Labor share is kept constant at its 1995–2023 average value of 51%.
- Capital:
  - Capital inputs until 2030 are aligned with IMF staff forecasts.
  - Capital accumulation equation used: K_{t+1} = I_t + (1−δ) K_{t−1}.
  - Depreciation rate δ kept fixed at its average 2015-2023 level.
  - Growth in the real capital stock is expected to slow from 5.5 percent in 2024 to 4.5 percent in 2030.
- Labor:
  - Labor input defined as hours worked: L_t = Working age population * labor force participation rate * (1 − unemployment rate) * average hours worked per worker.
  - Forecasts for the working age population from Eurostat.
  - Baseline migration scenario: working age population assumed to shrink by 1.1 percent per year.
  - Labor force participation rate and hours worked are kept constant at their 2023 levels.
- TFP:
  - Historically calculated as the Solow residual.
  - Average historical TFP growth around 1.6 percent.
  - TFP growth negative in 2022-2024 due to a terms of trade shock and labor hoarding.
  - Over the medium-term TFP growth is assumed to pick up again to close to 1 percent (the historical average over 2012-2024).
  - Population share aged 60+ increased from 19 percent in 2000 to 28 percent in 2023 and is projected to increase to 31 percent by 2030.

### Scenario Analysis — Migration Paths and Potential Growth Effects
- Trend and contributions:
  - Potential growth has declined over time; capital has contributed most, labor has played a negligible role, and TFP contribution has fallen.
- Baseline demographic projection (European Commission):
  - Decrease in Lithuania’s labor force by around 7 percent from 2025 to 2030, around 1.3 percent per year.
  - With constant participation and a slight increase in hours per worker, labor contributes negatively to potential growth at around −0.7 percent in 2030.
- Eurostat migration scenarios for working age population:
  - Downside (low migration): labor force decreases by 1.5 percent per year.
  - Baseline (medium migration): labor force decreases by 1.1 percent per year (as noted above).
  - Upside (high migration): labor force decreases by 1.0 percent per year.
  - The average labor force growth rate in the upside migration scenario is similar to a scenario with zero net migration.
- Net migration levels and equivalents:
  - Preventing the labor force from shrinking would require positive net migration of around 20,000 people per year—levels reached in 2020-23.
  - Yearly net migration of around 20,000 is equivalent to around 0.7 percent of the population.
- Cumulative net migration from Eurostat scenarios (working age population net migrants, 2025–2030):
  - Baseline scenario: around −20,000
  - Low migration scenario: around −45,000
  - High migration scenario: around 5,000
  - A no migration scenario (close to the high migration scenario) implies the labor force falls by 6.4 percent from 2025 to 2030.
- Potential growth sensitivity:
  - Potential growth could be 0.2 percent lower in the downside Eurostat migration scenario and 0.2 percent higher in the upside scenario.
  - Sustained migration closer to levels seen in recent years would increase potential growth strongly.
- Additional sensitivity:
  - A decrease in hours worked back to 2022 levels could reduce potential growth by up to 0.2 percent.

### Conclusions and Policy Recommendations
- Key conclusions:
  - Immigration can play a role in mitigating the impact of aging on the labor force and supporting potential output growth.
  - Recent immigrants have been successfully absorbed into the Lithuanian labor market; legislative amendments enabled easier migration for high-skilled non-EU workers despite the reduction of non-EU workers quota in 2025.
  - Given uncertainty about future immigration developments, addressing constraints limiting capital deepening and TFP growth is crucial.
- Policy recommendations:
  - Continue policies that integrate migrants in the most productivity-enhancing way possible.
  - Allow participation of foreign professionals in sectors with the largest shortages, including non-EU migration of lower-skilled workers where it addresses skills mismatches in specific occupations.
  - Address the large skills mismatch between the domestic labor force and vacancies; the right migration flows can partly alleviate this issue.
  - Engage the local population to ensure public support: inform about potential positive spillovers, ensure adequate provision of public services, and compensate potential losers where necessary.

*Prepared by Lukas Boer (EUR); International Monetary Fund, July 29, 2025.*

### 13.      These scenarios and the implications for potential growth are based on several

### 13. These scenarios and the implications for potential growth are based on several simplifying assumptions

### Uncertainty and key assumptions
- The uncertainty surrounding the scenarios is high, linked to:
  - uncertainty about the assumptions for capital deepening and TFP growth;
  - complexity of possible interactions between all the factors of production.
- The scope for increasing the labor force contribution is likely limited even with migration, making developments in capital intensity and TFP growth particularly important for projecting potential output growth.
- The next SIP will examine driving forces and remaining constraints affecting capital intensity and TFP growth and discuss structural reforms to unlock their full potential.

### Migration scenarios and population projections
- Scenarios presented include:
  - Baseline Scenario
  - Downside Scenario
  - Upside Scenario
  - +0.7% Net Migration Scenario
  - Zero Net Migration (for working-age population projection comparison)
- Lithuania: Net Migration (Percent of total population) is shown across 2015–2030 with immigration and emigration components and a Net Migration Baseline.
- Working Age Population Projections (thousand) are shown historically and across scenarios for 1998, 2001, 2004, 2007, 2010, 2013, 2016, 2019, 2022, 2025, 2028, 2031, 2034 with series: Historical, Zero Net Migration, Baseline, Downside Scenario, Upside Scenario, +0.7% Net Migration Scenario.
- The label explicitly notes: Sources: Eurostat, Lithuania Department of Statistics.

### Potential growth under migration scenarios
- Potential Growth under Different Migration Scenarios is presented as Percent change year-on-year for 2015–2030 for:
  - Baseline
  - Downside Scenario
  - Upside Scenario
  - +0.7% Net Migration Scenario
- Notes: Potential growth is historically higher in '+0.7%' scenario due to the HP-filter.
- Sources for the potential growth series: Haver, Eurostat, Penn World Tables, IMF staff calculations.

### Contributions to potential growth (yearly averages 2025-2030)
- Contributions broken down by component:
  - TFPLaborCapital (chart shows components TFPLaborCapital and aggregate Potential growth)
- Axis range in the chart indicates values from -1 to 5 (Percentage points, yearly averages 2025-2030).
- Sources: Haver, Eurostat, Penn World Tables, IMF staff calculations.

### Implications and next steps
- Because labor force gains from migration are constrained, policy focus should emphasize:
  - understanding and fostering capital deepening;
  - understanding and fostering TFP growth.
- A forthcoming SIP will provide a deeper analysis of driving forces, remaining constraints, and structural reforms to realize potential gains.

*Source: REPUBLIC OF LITHUANIA — INTERNATIONAL MONETARY FUND, chapter text, figures and notes as provided.*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025138.pdf_