Little respite for Europe’s ageing labour market

Despite revising our labour supply projections up, the Eurozone’s rapidly ageing population will lead to a 6% decline in potential workers by 2050 from a peak in 2029. This bleak long-run outlook for labour supply will help drag Eurozone potential growth below 1% per annum by the mid-2030s.

What you will learn:

• Stronger-than-expected migration is boosting population growth, particularly in Spain, and rising retirement ages have supported labour supply. Falls in structural unemployment imply increased labour market efficiency. Taken together, our potential employment forecast is around 1.2% higher in the long run than a year ago.
• These factors won’t stop the Eurozone labour supply from eventually declining. But some countries still have wide gaps in their male-female participation and closing these may be more politically feasible to implement than raising retirement ages. A 1ppt upside surprise to our participation rate would double labour supply growth over the next few years.
• Our structural unemployment rate revisions are a boon to potential employment, meaning they’re able to handle more workers for a given rate of inflation and that the historically low unemployment rate is not primarily due to cyclical, inflationary tightness. This makes the European Central Bank’s concerns about labour market tightness overdone.