Sunday, June 24, 2012

Eastern Europe's Coming Labor Force Implosion

Although the collapse of communism in Eastern Europe was overall clearly a good thing, one has to concede that the transition away from it did cause a lot of hardship for many people, especially since it was usually done in an incompetent and corrupt way. As a result of this widespread hardship, many felt that they couldn't afford children and birth rates across Eastern Europe plummeted in the early 1990s.

 In Poland for example, the crude birth rate (births per 1000 people) fell from 18.2 in 1985 to only about 10 in the 1990s. Because it has been roughly 20 years since the early 1990s and because people born then would therefore be in their late teens now, we can see this collapse in the change in the number of 15-19 year old.

In Estonia for example, the overall population was roughly unchanged at 1.34 million between 2007 and 2011, but the number of 15-19 year olds fell by nearly 28%, from 102,500 to 74,400 Some people, when analyzing Baltic state demographics has misinterpreted these numbers as signs of mass emigration as 15-19 year olds are usually counted as part of the working age population. Yet in reality most 15-19 year olds are still in school something that both means that they usually still live with their parents and therefore don't make decisions about emigration and it also means that they are effectively not part of the working age population even if official statistics say they formally are. The latter means that though the formal labor force in Estonia and other Baltic and Eastern European countries have already begun to shrink significantly, the number of people that really have jobs or are searching for them hasn't begun to shrink significantly-yet.

If we look at the next age group, 20-24 year olds, it has only shrunk by about 0.5% between 2007 and 2011 and the number of 25-29 year olds actually increased, numbers that first of all refute the hypothesis of mass emigration at least for Estonia and secondly means that in 2011, the labor force hadn't effectively shrunk even though it had formally done so because of the massive drop in the number of 15-19 year olds.

However, 15-19 year olds in 2011 will of course be 20-24 year olds in 2016 and 25-29 year olds in 2021, and as the 2011 15-19 year group gradually move to the 20-24 year group, this means that the real labor force will start to shrink rapidly in the coming decade. This will only get worse as the number of 10-14 year olds in Estonia was even fewer than the number of 15-19 year olds, 61,400 compared to the 74,400 who were 15-19 year olds and the 105,700 who were 20-24 year olds.

The total drop in the number of young workers will therefore over the next decade or so will therefore be more than 40%! The exact magnitude of this demographic collapse probably differ somewhat between different Eastern European countries, but given that Estonia was one of the best run of the Eastern European countries after communism, it is at least as likely that the numbers in most countries will be worse, not better, than in Estonia.

As Estonia and most other Eastern European countries have high unemployment, this needn't put a stop to growth during the coming years. Germany for example have managed to grow somewhat in recent years despite a shrinking working age population by both reducing unemployment and increase the labor force participation rate. However, as the labor force will begun to shrink dramatically, growth in Eastern Europe will be strongly inhibited, especially since their relative poverty (GDP per capita was only €12,000 in Estonia in 2011, compared to €32,000 in Germany) will make it more difficult for them than for Germany to attract the kind of workers they need.