| 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.
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