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    RESEARCH | MACRO SHIFTS

    Demographic trends point to structural issues in labour supply

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    Silvia Ardagna, Marc Giannoni, Jonathan Millar

    08 Sep 2023

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    As populations in certain developed economies age, their working behaviours are also shifting. These changes are fundamentally altering labour supply, prompting governments to consider how and when to intervene to avoid a potential slowing of GDP. Our Research team has examined the important signals within this long-term trend in six nations.

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    Silvia Ardagna, Marc Giannoni, Jonathan Millar

    08 Sep 2023

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    The global population wave

    For several decades, population growth has been a key driver of increasing labour supply. However, this trend is reversing, as the bulge of workers nearing retirement age in many countries inevitably age out of the workforce. Looking at data from six countries – the UK, US, France, Germany, Spain and Italy – our Research team has identified a clear shift in population distribution by age as the current peaks of 50-65 year olds transition into retirement in the next 20-25 years.

    The issue of such high numbers ageing out of work is compounded by the fact that overall population growth is slowing, and is on course to plateau in the United States and the United Kingdom, and become negative in the Euro area.

    Since at least 2015, several Euro area countries have been experiencing negative natural population growth (defined as births offset by deaths, not including migration). Germany’s natural population has been decreasing by c.-100,000 people per year since the 1990s. While natural populations are not yet declining in the US and the UK, both are projected to in 10 and 20 years, respectively. This means a smaller pool of potential entrants into the workforce, to replace those who are reaching the usual age of retirement.

    Participation shifts

    Of course, population figures are only one lens through which to view labour supply. To get a more comprehensive view, it is crucial to consider the labour force participation rate (LFPR), or the share of the population active in the labour market, which reveals added complexity to the labour supply issue.

    Data show that in all countries studied, with the exception of Italy, total hours worked per year have increased over the past two decades. However, the number of hours worked per person has decreased over the same period. So, more individuals are working, but each is working less.

    Universal proxy impact

    Looking at the LFPR across different demographic groups, as shown in the chart below, it is notable that several countries currently have above average participation in both the 15-19 and 65+ brackets. Traditionally, these age groups would not be working yet, or would have retired already. Although younger cohorts in the US, the UK and Germany are remaining in school for longer, they appear to be blending their studies with work more than those in France, Spain and Italy. Likewise, larger numbers of people nearing retirement in the US, the UK and Germany are delaying their exit from the workforce than in France, Spain and Italy. 

    Possible reasons for these trends vary. Those working fewer hours may be taking advantage of increases in real wages over the years. Higher wages provide better opportunities to enjoy more leisure and arrange work around a preferred lifestyle, with less sacrifice in terms of foregone purchasing power. Others may be unable to work as much as they’d like due to structural or personal barriers.

    The experience is similarly mixed for those newly entering the workforce or remaining in it longer. Some need to remain in the workforce for longer because they lack the wealth necessary to afford full retirement, or because of variations in government pensions. At the same time, variations in access to childcare and the availability of flexible working arrangements affect whether people can enter or remain in the workforce.

    The gender re-balance

    There are also some significant patterns across the gender divide when it comes to increasing or decreasing labour force participation.

    For males, the story is a mostly uniform one of general decline with a recent uptick. Participation rates among male cohorts aged 15-54 had seen a steady long-term downtrend before turning up modestly in the last couple of years. For 55+ cohorts, this recent increase is more pronounced.

    Universal proxy impact

    For females, the story is different. Again, we can see a general decline among the 15-24 cohort as people spend longer in education. But we also see steady increases in participation in most countries amongst the 25-54 group, and, often, dramatic rises within the 55+ cohort, consistent with effects of gender-based structural culture shifts, higher educational attainment, and lower birth rates. However, these favourable trends for females may be running their course and will not necessarily fill labour supply gaps from population ageing.

    Universal proxy impact

    Intervention complications

    Although overall participation rates are increasing, thanks to tight labour markets attracting people into employment, this cannot continue forever given the inevitable effect of ageing populations on labour supply. Without intervention, labour supply in developed economies will be significantly affected as people reduce the amount they work and are not replaced through natural population growth.

    Governments could offset this decline in several ways, such as through policies to encourage migration, increase birth rates and delay the retirement age. But these approaches may either face resistance or, in the case of pro-fertility measures like increased child benefits or tax incentives, have questionable long-term efficacy.

    National government-provided retirement benefits are being recalibrated across most of the countries surveyed to encourage later retirement. However, there has been considerable pushback against these measures in several countries, including public protests.

    Note: “Future” refers to the eligibility age, as of 2020, for full retirement benefits from all mandatory components (without any reduction), for those starting a full career at age 22. Educational credits are not included. For Italy, the current normal retirement age is based on `quota 100’, a temporary measure introduced for 2019-21 that allows earlier retirement.

    Likewise, all the countries examined have benefited from various forms of migration over the last 10-15 years. Migrants tend to be younger and have higher fertility rates, so are therefore likely to be net contributors to longer-term increases in the workforce.

    Universal proxy impact

    Looking ahead

    It is clear that labour supply within developed economies will slow, or even decline, if these structural issues are left unaddressed. The deeper impact remains to be seen, but there is a distinct possibility that this shift will decrease GDP growth.

    How this will affect real neutral interest rates remains highly uncertain, but over the coming five years, demographic dynamics might suggest lower R-star. However, with populations potentially hesitant about possible solutions to this problem, governments may find it challenging to arrest projected declines.

    That said, there are potential routes that may mitigate the drag. Technological advancements and increases in human capital and investment could boost productivity growth and limit the impact of declining work hours on GDP.

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    About the analysts

    Silvia Ardagna

    Managing Director and Head of European Economics Research

    Silvia Ardagna is a Managing Director and Head of European Economics Research. Based in London, Silvia leads the team covering the Euro area countries and some of the small open European economies. Silvia joined Barclays in 2021 from Goldman Sachs, where she was a managing director in the Investment Strategy Group in the Consumer and Investment Management Division and in Global Investment Research from 2012 to 2021. Prior to joining the private sector, Silvia was an associate professor at the Department of Economics of Harvard University from 2004 to 2010. She has been visiting fellow at the European Central Bank and The International Monetary Fund and she is a leading expert in the area of fiscal policy. Her academic research has been published in top refereed journals and has been influential in shaping the policy debate around fiscal issues. Silvia earned a BA and MA in Economics from Bocconi University and a PhD from Boston College. She is married and has two sons.

    Marc Giannoni

    Managing Director and Chief US Economist

    Marc Giannoni is a Managing Director and Chief US Economist at Barclays. Prior to joining Barclays in 2022, Marc held positions at the Federal Reserve banks, as SVP and Research Director at Federal Reserve Bank of Dallas (2017-22) and Research Economist at Federal Reserve Bank of New York (2000-02, 2011-17). He was also an Associate Professor at Columbia Business School (2002-10). Marc is a native of Switzerland and began his career as an economist with the Swiss National Bank in Zurich. Marc’s research focuses on broad macroeconomic and policy issues, including monetary policy strategies, the transmission of monetary policy, interest rates and inflation determination, and labor markets. He co-led a team that developed the analytical work underlying the review of the Federal Reserve monetary policy framework released in August 2020. Marc holds a BA and MA degrees in economics from the University of Geneva in Switzerland and MA and PhD degrees in economics from Princeton University.

    Jonathan Millar

    Director and Senior US Economist

    Jonathan Millar is a Director and Senior US Economist at Barclays in New York. He contributes to the US economics outlook and has expertise in a number of subject areas, including monetary policy, productivity, business investment and the industrial sector. Prior to Barclays, Jonathan was a Principal Economist at the Federal Reserve in Washington, DC., where he coordinated the staff macroeconomic outlook, served as an expert in housing and business investment, and headed a group that assessed the financial stability implications of proposed bank mergers. He also spent two years in Paris as an economist with the Organisation for Economic Cooperation and Development (OECD), where he wrote country surveys for the United States and Iceland. Prior to these roles, Jonathan had positions the Bank of Canada and the IMF. Jonathan earned his Doctorate in Economics from the University of Michigan and holds Masters Degrees in Economics (UBC) and Financial Engineering (Michigan).

    Abbas Khan

    Assistant Vice President in Macro Research

    Abbas Khan is an Assistant Vice President within the Macro Research group at Barclays, working on the UK Economics team. He is based in London and joined the firm as a graduate in 2019. Abbas holds a BA with Honours from the University of Cambridge.

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