The anticipated impact of population ageing on shrinking the labour force in Europe is a growing matter of concern among policy makers. But might the impact of ageing be alleviated by expanding education?  In this post, Elke Loichinger from the Vienna Institute of Demography (VID) and the Vienna University of Economics and Business (WU) addresses the question of how projections of the size and structure of the labour force across 26 European countries change once education is factored in.  

A significant body of demographic research has looked at the potential economic consequences of population ageing in developed economies (Boersch-Supan 2003; Lee and Mason 2010; Bloom, Canning, and Fink 2011). A recurring theme in this literature is the expected shortage of labor supply: if age- and sex-specific patterns of economic activity stay at current levels, the share of people who are economically active is expected to decrease over time, thereby posing a threat to the sustainability of social welfare systems and economic growth.

However, the absolute size is only one dimension of how labour forces will change in response to wider changes in population composition. The notion that a smaller but more productive labor force might be able to alleviate some of the expected economic consequences of population ageing has been increasingly acknowledged in recent years (see for example Fougère et al. 2009; Ludwig, Schelkle, and Vogel 2012).

In my recent paper in Demographic Research, I added highest educational attainment, as well as age and sex, to labour force projections for Europe. The goal of adding education was twofold: first, to quantify how the inclusion of education can change the absolute size of long-term labor force projections until 2053, compared to projections that do not account for education. Individuals with higher education levels consistently show higher levels of economic activity in Europe, so disaggregating the population by education can positively impact overall labour force participation. Second, my projections show how Europe’s future labor force will be different with respect to its human capital structure. Educational expansion entails that different birth cohorts show significant differences in their educational attainment, a development that goes unnoticed unless this third dimension is explicitly considered.

My projections covered 26 EU countries and used two education categories: those that hold a tertiary degree and those that do not. Each country’s population and labour force participation were projected separately until 2053, and then combined, resulting in the projected labor force for each country.

For the whole of the EU, the share of the adult population who obtain a tertiary degree is expected to increase from 20% to 36% between 2010 and 2050, assuming global trends in educational expansion continue (KC et al. 2010). Naturally, there are already (and will remain) significant differences between countries, but the share of the population that holds a tertiary degree is expected to increase in each country during the next decades. Also, as observed already today, young women are better educated than men in many countries, and this trend is projected to continue.

As described before, given that the tertiary-educated have higher labour force participation rates in Europe, by accounting for a shift in the educational attainment structure in the population my projections show a larger labor supply, assuming the observed educational differentials in participation persist. Keeping participation rates constant at their 2008 levels, changes in the education structure of the population would entail a 4.1% larger labor force in 2053 in Europe compared to calculations that do not include educational attainment. On the country level, this effect ranges from 2% to 8% (see Figure 1). However, despite these adjustments in labour force size, unless the participation of women and those aged 55+ increases, the size of the labor force is projected to decline in 16 out of 26 countries between 2008 and 2053.

Figure 1: Difference in total labor force size in 2053 between education-specific and non-education-specific projections, by country (constant participation scenario; own calculations).

Since the anticipated decline in labor force size is accompanied by the expected “upgrading” of the labor forces’ human capital, the decrease might not hit the economy as hard as it would if the educational composition were to remain unchanged. In all 26 countries, the share of workers that possess a tertiary degree is projected to increase significantly for all age-groups, including older workers. For example, while a fourth of the economically active population between ages 55 and 64 in 2008 had a tertiary degree in 2008, the share will increase to over a third by 2033, and surpass 45% by 2053. This higher educated and consequently likely more productive labour force will help offset the challenges of its shrinking size.