CEE - 10 challenges for the new decade
No. 1 Demography

To mitigate its shrinking working age population, CEE has a hidden reserves in low female labor participation, low effective retirement age, as well as more active migration and family policies.

There is no quick way to escape aging as the working age population is projected to shrink further. Two decades ago, share of people aged 65 or more was one third lower and it is going to continuously increase. As a consequence, the old-age dependency ratio is projected to double within thirty years, meaning there will be twice as many elderly people per working person as there are now.

The current demographic outlook is the combination of three factors: dropping fertility rates (transition and ostponement effect) increasing life expectancy at birth (plus seven years since 1990) and the fact that the largest population cohorts (born in 1970-80s) will retire in 2-3 decades. All else being equal, a shrinking working age population is considered to have a negative impact on long-term growth, unless changes in productivity follow (human capital quality automation etc).

The CEE region could, however, mitigate the negative impact of demographic changes with policy responses focused on the following areas:

  • Rising labor force participation, especially among women
  • Increasing effective age of retirement
  • Adjusting migration policies and improving institutional frameworks
  • Introducing family-oriented/fertility-boosting policies.

Closing the female employment gap between CEE8 and Euro Area could bring almost 1 million female workers. Increasing the effective retirement age would additionally limit the costs for public finance. Migration policies should focus not only on attracting a high-skilled labor force from less developed countries, but also on limiting emigration from region. We believe that the improvement of the institutional environment in the country and higher income convergence could support a reversal of migration flows. Last but not least, policies enhancing fertility would be highly desirable, as a replacement ratio of 2.1 is far above current fertility rates.

Working age population will continue to shrink…

Population aging is visible across all indicators. Share of working population has dropped over last decade from its peak at 69% to 65% and the downward trend will continue. The median age has increased. The share of the elderly in the population has been rising (it roughly doubled since transition), as life expectancy at birth has gone up visibly over thirty years. More importantly, the expected number of years in good health after 65 has been growing as well. While the growing elderly population is mostly seen as a burden to public expenditure (retirement, health care), compression of morbidity (the relative or absolute length of life spent in chronic ill health) may reduce at least some of the burden of aging.

…as fertility rates are below replacement ratio. 

Population growth in the region was hit particularly hard, with fertility rates diving shortly after transformation. They reached all-time lows (slightly above 1) in early 2000 in most CEE countries and began to converge toward the European average (1.56 as of 2017). With the variety of opportunities opening up after transition, the median age of women at first birth increased visibly, from 23 in the mid-1990s to 27-28 currently. Instead of having children, women rushed toward education. The share of women in reproductive age with tertiary education increased four or even five times since early nineties. While this initial drop in fertility was mostly temporary (fertility rates have been on the rise since 2000), the postponement effect may not have ended yet as evidenced by gradually but constantly increasing age at birth in western countries. Further, the fertility rate tends to drop together with economic development. All in all, fertility rates in CEE remain well below the replacement ratio of 2.1.

Increasing female workforce could help labor market 

Although making fertility rates increase is a marathon, CEE could buy time by increasing its female workforce. There is a gap between CEE and the EA (Euro Area) in female employment, that is even bigger compared to Sweden – a country with one of the highest female employment rate. Closing this gap would potentially bring millions of female workers to the job market. Further, both fertility and female labor participation could benefit from developing appropriate institutional childcare in CEE. Analysis of German reform from mid-2000 suggests that expansion of public child care has positive effect on fertility, in particular, increasing the incidence of second
and third birth. 

There is also evidence in CEE that government policies seem to play an important role in how women decide on employment. In Poland, particularly, the introduction of generous child benefits seems to have lowered employment among lower educated women. In the Czech Republic, there is evidence that the introduction of joint taxation in 2005 led to a decline of about 3pp in the employment rate of married women with children. Further, part-time employment, which could particularly encourage young mothers to return to the job market, remains a limited option in CEE. 

Another important aspect of labor force participation is employment by age group. Employment rates remain low, especially among women above 55, as many of them take advantage of early retirement, making the effective retirement age among the lowest in the OECD world. 

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CEE Challenges for the new decade:

No.2 Going Green

No.3 Rule of Law

No.4 Healthcare

No.5 Euro Adoption

No.6 Labor Market

No.7 Education

No.8 Regional Development

No.9 Capital Markets

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