The Euro Area Workforce is Aging, Costing Growth

IMF Blog, August 17, 2016

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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.
In parallel to population aging, the average age within the labor force is rising, which can affect average productivity depending on age-cohort productivity profiles.
Literature consensus cited: productivity increases with age at first, peaking sometime in the 40s or 50s, and then diminishes.

Sample and period: a sample of European countries from 1950 to 2014 was used to examine the relationship between workforce aging and labor productivity.
Main estimate: 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.
Decomposition: Changes in output per worker reflect physical and human capital and total factor productivity (TFP); TFP is identified as the principal long-run driver of growth.
TFP channel: A five percentage point increase in the share of workers aged 55–64 is associated with a decrease in total factor productivity of somewhere between two and four percent.

Medium- to long-term toll: Workforce aging will take a considerable toll on productivity growth.
Baseline TFP growth: Average total factor productivity growth in the euro area is forecast to be around 0.8 percent per year.
Counterfactual without aging effect: TFP could be higher by a quarter—that is to say, total factor productivity could increase to about one percent per year—if the effect of workforce aging were shut down.
Cross-country unevenness: The burden of workforce aging will fall unequally across euro area member states; some of the largest adverse effects are projected for Greece, Spain, Portugal, and Italy, which already face elevated debt levels and limited fiscal space.

Health improvements:
- Health conditions—measured in the study by the availability of doctors—are particularly important.
- Sufficient improvements in this indicator have the potential to substantially reduce the negative effects of aging on productivity.
- Older age groups are likely to use medical services to a greater extent and thus benefit disproportionately from public interventions to improve healthcare.
Active labor market policies:
- Worker training or re-training programs can mitigate the impact of aging, being disproportionately beneficial to senior workers whose skills may lag evolving technologies and job requirements.
Other public policies:
- Reducing the difference between gross income and after-tax income by cutting the rate of tax on marginal employment.
- Investing in research and development.

Source: Shekhar Aiyar, Christian Ebeke, Xiaobo Shao — August 17, 2016.