Professional activation counteracts negative demographic trends in CSE

The working age population significantly decreased in the economies of Central and Southeast Europe due to the falling birth rate and emigration, which also caused a decline in the quality of human capital.

On the one hand, the demographic changes reduced working age population but on the other hand, the decrease was offset by an increase in professional activity and the quality of work, as well as a decline in unemployment.

Changes in the labor supply made a positive contribution to economic growth over the last two decades. Labor supply, defined as the number of people working in a given economy (quantitative aspect) and the quality of the performed work (the qualitative aspect, identified with the change in human capital) is one of the factors affecting the rate of economic growth. The contribution of labor supply, taking into account both changes in employment and the improvement in the quality of human capital, had a positive effect on GDP growth in the countries of Central and Southeast Europe (CSE) in the years 2000-2015.

In the last decade, the size of the working age population significantly decreased in the economies of CSE due to the falling birth rate and emigration. In the years 1990-2015, the population of the countries of the CSE region clearly dropped. Until 2005, the population decline mainly related to pre-working age people up to 15 years of age (due to the lower fertility rate). This group has decreased by almost 40 per cent throughout the region.

Since 2005, the number of working age people has also been decreasing, mainly due to mass emigration. Over the last 25 years, more than 14 million people emigrated from the countries of CSE, which represents approx. 13 per cent of the population. These were mostly people of the working age.

The mass emigration from the CSE region contributed not only to a reduction in population, but also caused a decline in the quality of human capital. The emigrants were typically young people, often better educated than the overall population of the region.

The scale of emigration in the region was highly diversified, however. The largest outflow of people occurred in Bulgaria, Romania and the Baltic states. Eurostat estimates indicate that because of emigration the populations of these countries decreased by approx. 20 per cent in the years 1990-2014. In the case of Bulgaria and Romania the high percentage of emigrants was associated with the large differences in the level of average wages in relation to the target countries of migration.

Meanwhile in Latvia and Lithuania the large-scale emigration in the first half of 1990s was the result of a mass exodus of representatives of national minorities, especially Russians and citizens of other republics of the former Soviet Union. The Baltic countries also experienced the strongest decline in economic activity in Europe during the global financial crisis. This resulted, among others, in a marked decrease in wages and provided a strong incentive to seek work abroad, especially for highly qualified workers.

In the Czech Republic and Slovenia emigration did not have such a significant impact on labor supply in recent decades because the outflow of emigrants was compensated by an influx of immigrants. These were largely people from countries of the former Soviet Union and Asia, but also from other CSE countries. In recent years we have seen migrations of Slovaks to the Czech Republic, of Romanians to Hungary, and of the inhabitants of the former Yugoslavia, mainly Bosnians, to Slovenia.

Professional activity

Professional activity, the increase of which could mitigate the effects of population decline in the CSE countries, remains low among the youngest and oldest workers. In recent years the negative demographic trends were alleviated by an increase in the professional activity rate and the employment rate. However, both of these indicators in CSE countries still diverge from the corresponding indices in the countries of Western Europe.

The low economic activity in the CSE is primarily visible in the youngest and oldest age groups, which is the result of the late age at which people in the region start professional work, and also the relatively early age of retirement.

While in the age group 25-54 the professional activity rate and employment rate in CSE and in the EU-15 are similar when it comes to the participation of the oldest and the youngest people in the labor market, most countries in the region clearly lag behind the average for the EU-15. That is why the average period of activity on the labor market is over two years shorter than in the EU-15 and over 7 years shorter than in Sweden.

The reasons for the relatively late entry of young workers on the labor markets in the CSE countries include, among others, the mismatch between the education system and the requirements of the market, the reduction of vocational education in favor of general education, the extension of the number of years spent on education, underdeveloped active policies to promote employment, and the low progressivity of the tax systems resulting in relatively high tax burdens for the lowest earners.

In turn, the earlier retirement of workers is the result of the structure of the pension systems. Firstly, the statutory retirement age in the CSE countries was lower than in Western Europe (by 2 years for men and 4 years for women in 2015). Secondly, the high replacement rates (i.e. the ratio of the pension to the last pre-retirement net salary) and the ease of obtaining early retirement meant that these systems not only did not encourage economic activity beyond the statutory retirement age, but even created incentives for workers to leave the labor market early.

Another culprit is the underdeveloped segment of training for older workers. The percentage of workers aged 55-64 who participate in training is almost twice as low in the CSE countries as in the EU-15 and almost three times lower than in Sweden and Denmark. Due to the limited opportunities to acquire new skills, older people have trouble staying on the labor market and decide to leave it quicker.

Increased activity of women

The consequences of the population decline in the CSE region may also be alleviated by the increased professional activity rate of women.

A smaller percentage of economically active people in the youngest and the oldest age groups is the result of the relatively low participation of women in these age groups in the labor markets. In the case of young women the low rate of professional activity is a result of quitting work after having a child. The CSE countries often lack the systemic solutions enabling women to easily and flexibly combine work and childcare, e.g. easy access to organized childcare. In Bulgaria, the Czech Republic, Poland, Lithuania and Slovakia, over 90 per cent of children up to 3 years are not enrolled in organized care outside home.

In turn, the low participation of women in the older age group is the result of the structure of the pension systems, and in particular the difference in the retirement age of men and women. In contrast with the majority of EU-15 countries, where the statutory retirement age for men and women is the same, in the CSE women retire approx. 5 years earlier than men. The exceptions include Estonia, Latvia and Slovenia, and in these countries the differences in the labor force participation rate of women and men are the lowest in the region.

Geographic mobility

The low employment rates, especially in Bulgaria, Romania, Slovakia and Hungary, are in part the result of a high variation in the level of development of the individual regions of these countries, which is accompanied by a relatively low willingness and ability to relocate. Investments creating new jobs are most frequently located in capitals, major cities or in specialized clusters – the demand for labor is the highest there.

In the remaining regions (e.g. in eastern Slovakia, north-eastern Hungary and south-western Romania), the number of created jobs is much lower. Employees are reluctant to move from poorer regions to those where the new jobs are created – if they do change their place of residence, they choose to move abroad instead.

Internal migration is not encouraged by the underdeveloped rental housing market, which reflects, on the one hand, the strong preferences of inhabitants of CSE countries to have their own homes, and on the other hand, the lack of progress in the implementation of solutions supporting the development of a private rental housing market.

The negative demographic trends were mitigated by an increase in the quality of human capital, primarily as a result of the popularization of higher education.

At the end of the 20th century less than 20 per cent of people aged 20-25 were students of higher education institutions. Only 15 years later this rate was twice as high and exceeded the average for the EU-15. In the next dozen or so years we can expect a further increase in the number of people with higher education, but in the longer term the process of replacement of older workers by younger workers with a higher level of education will be completed, which will limit the contribution of changes in the quality of human capital to economic growth.

Unfortunately, while the percentage of students in the CSE increased significantly, the assessment of the quality of education remains low. In the rankings of the best universities in the world there are no CSE universities among the 300 top institutions. This is confirmed by the quality of education indicators of the Global Competitiveness Report (GCR). Higher education systems in most CSE countries are poorly evaluated not only compared to the developed countries, but also to many developing countries, especially Asian ones.

The results of the international survey of adult competencies (Program for the International Assessment of Adult Competencies – PIAAC) indicate that the level of competencies in CSE countries is lower than the average for all OECD countries. This applies in particular to mathematical skills and problem-solving skills.

Demographic projections indicate that the population decline will also continue in the coming years, although the rate of the decline should slow down. While the negative natural growth rates will be maintained, the scale of emigration to foreign countries will decline significantly.

In the CSE countries there are still some reserves of inactive potential employees, which could compensate for the population declines. This particularly applies to the groups with poor professional activity rates, i.e. the youngest and the oldest people, who often lack high qualifications, as well as women. The experience of the countries of Western Europe shows that this is possible. It would also be worth encouraging people to stay in the labor market as long as possible. It is important to ensure constant investment in the improvement of the quality of human capital, which in the case of CSE countries should focus on an increase in the quality of education and the popularization of professional training among people who are already employed.

Marcin Grela is an economic expert of the Global Economy Analysis Division in the Economic Analysis Department of NBP. His opinions do not represent the official position of Narodowy Bank Polski.

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