The population in Germany will age in the coming years and fall significantly in the future. This will also have an impact on the labour market. For example, according to a projection in the Bundesbank’s April Monthly Report, the number of people of working age, ie between the ages of 15 and 74, will drop by nearly 2.5 million by 2025. The demographic-related fall in the labour supply will accelerate over time, according to Bundesbank experts. At the same time, the share of the population made up by older people aged between 55 and 74 will increase by 7 percentage points to roughly 40%.

Compared to a previous projection by the Bundesbank in 2012, the projection horizon has now been extended by five years to 2025. It is based on the current population projection of the Federal Statistical Office as well as the Bundesbank’s own assumptions concerning expected immigration in the coming years.

Growth could fall considerably by 2025

In the baseline scenario, the labour force potential, ie the available domestic labour supply over the medium term, is expected to be roughly the same in 2025 as it was in 2016. The labour force potential is initially likely to continue to increase until 2021, after which a significant fall is expected due to the baby-boomer generation exiting the labour market. Therefore, according to the Monthly Report, a steady growth in the labour force potential is not to be expected over the coming years.

Demographic change will also have an impact on trend economic growth in Germany. Bundesbank economists expect the German economy’s production potential to grow considerably more slowly in the coming years than of late. In the years 2011 to 2016, potential growth stood at nearly 1¼% on average. According to the projections, it could fall to just over ¾% per year on average between 2021 and 2025. The main driver of this change is the demographic-induced decline in the total number of hours worked, ie the labour input of all persons in employment.

Immigration unable to prevent fall in labour supply

Two factors have thus far counteracted the projected drop in the labour supply. First, the participation of older people in the labour force has risen in recent years. Bundesbank economists expect this to continue in the coming years, too. However, they note that the further activation of domestic labour will probably exhaust any remaining potential. Second, the current high level of immigration is slowing the demographic-related trend.

The Bundesbank assumes there was net migration of around 500,000 people in 2016. According to the projection, this is expected to fall to 200,000 per year by 2025. This would mean a total of nearly 2½ million people coming to Germany, which would increase the labour force potential by nearly two million people. However, this projection is subject to a high degree of uncertainty. If immigration turned out to be only half as high as assumed in the baseline scenario, the labour force potential would already begin to fall in 2020. Cumulatively, one million fewer people would be available to the labour market by 2025, according to the Monthly Report. Even in the scenario with higher immigration, the demographic trend cannot be stopped in the long term. The fall in the labour supply would then merely be delayed, starting in 2023.

Demographics dampen labour productivity

Demographic change influences not only the total number of hours worked, but also labour productivity. In the short term, productivity in an ageing society can, for example, be boosted on account of the fact that older workers, whose share of the labour force is set to increase in the coming years, are more productive than younger ones. However, according to the assessment of Bundesbank economists, in the medium to long term, demographic change is likely to have a rather dampening effect on productivity growth. This is partly because the labour productivity of older members of the workforce typically plateaus, hardly making any new gains. Furthermore, in an ageing society, services, such as care for the elderly, gain in significance compared to the production of goods. As, judging by experience, the productivity of service providers is lower than that of the production sector, ageing economies could exhibit lower macroeconomic productivity growth, at least during the demographic transition process, note the Bundesbank’s economists.