Latvian Population Dynamics

I seem to be having a Latvia week. I gave a long post on Global Economy Matters analysing the current serious wage and price inflation problem the country is having, and a shorter summary post (more accessible if you are not an economist) on A Fistful of Euros which really tries to draw attention to why the problems this comparatively small country (population around 2 million) is having may be significant and interesting for people to think about in a much more general context.

The issue is labour supply and economic growth (what Claus and I call the "capacity problem"), and how a very tight labour supply in Latvia is producing an astronomical 33% annual increase in wages. The problem is basically how a society which has experienced strong out-migration and lowest-low fertility during an extended period can sustain strong economic "catch up" growth (which of course all the Eastern European societies need if they are to come anywhere near the per capita incomes of Western Europe) given the constraint that is produced on new labour market entrants.

Basically, economies can grow in one of two ways. They can either grow horizontally (by expanding economic activity in existing product categories) or the can grow vertically (by moving up the value chain). The problem is that it is a lot more difficult to achieve rapid vertical growth in a short period of time, since moving into new economic activities is, by its very nature, a comparatively slow process given that new human capital needs to be formed, experience needs to be gained, and learning-by-doing needs to take place. Thus bottlenecks inevitably arrive (Indian outsourcing growth would be one good current example of this issue). So during the initial periods of catch-up growth it is normal that horizontal growth plays an important part (this process is what economists tend to call the initial accumulation of inputs). This was clearly the experience, for example, in the classic case of the Asian tigers, were it is clear that strong productivity driven growth only took place at a later stage (China may now be about to become another example of this).

But the problem for countries like Latvia is they do not have the latent human resources to really get the benefits from this "inputs accumulation" process. At comparison of the Latvian projected population pyramid changes 2006-2025, and the Irish one 1986-2000 (which I have put up here) may help make this clearer.

What follows below is an edited version of the demographic component of my Global Economy Matters post. I think it is also important to note that - as Claus points out in this post - this tendency, which is now making its presence felt in Latvia will soon extend across Eastern Europe and Central Asia, (you can find a chart showing the labour force change projections for these countries between now and 2025 here). All of this takes on a certain importance when we think about the kinds of issues we were discussing in the Polish context (here), and if we look at the present rate of decrease in Polish unemployment. Poland's unemployment rate fell in May 2007 to 13 percent, and this was a decrease of 23% in one year (and Polands economy, remember is "only" growing by 6.5% a year). If this process continues, Poland will have an unemployment rate of 9% in May 2008, 7% in May 2009, 5% in May 2010, and 4% or below in 2011. So within 4 years Poland could hit a growth-constraint wall. This is all remarkably rapid indeed. Of course, growth may falter, but in which case it is hard to see how Poland can ever catch up with Western Europe. This is a race against time in some ways, before a window of opportunity closes.

Russia itself is already feeling the pinch, and out further East Azerbaijan's economy is growing at 35% a year. In the Russian case, John Litwack, the World Bank's chief economist in Moscow, estimates that Russia is going to need about a million migrants a year.

To compensate for this(the labour force decline, EH), Russia would need an annual inflow of 1 million immigrants, which is three times as the average official annual flowover the last 15 years, and five times the official flowin recent years.


Latvia, Fertility, Migration and the Labour Supply


So how big is Latvia's demographic problem? Well to try and get some sort of appreciation of the order of magnitude here we could think about the fact that during 2006 Latvian employment was increasing at an annual rate of around 70,000, while if we look at live births for a moment, we will see that since the early 1990s Latvia has been producing under 40,000 children annually (by 2006 this number is down to 21,000 (as the chart below makes clear).



Indeed ex-migrant flows, the Latvian population is now falling (by 0.648% annually according to the 2007 edition of the CIA World Factbook), and at a significant rate (the birth rate is at a very low level, 1.3TFR in 2006 according to the Population Reference Bureau). Taking into account uncertainties about out-migration (which is almost certainly greater then is reflected in the official statistics) in fact the rate of decline might be even greater.

At the same time the internal employment situation is becoming ever tighter, with unemployment levels becoming ever lower (see chart below, data 2005, and Q1 2005 through Q3 2006).

(please click over image for better viewing)


As can be seen in Q3 2006, employment was increasing at a rate of 7.2% (y-o-y), while the unemployment rate was down to 6.2%. Put another way, an increase in employment of some 75,000 had produced a reduction in the unemployment rate of 2.5% (or about 30% of the registered unemployed). It doesn't take sophisticated mathematics - or "robust" models - to see that this cannot last.

One solution is obviously to try and increase the level of labour market participation, but - and it is interesting that almost no-one here seems to be talking about the need for labour market reforms - it is hard to estimate just how much potential in reality there still is for this. According to the Latvia Statistical Agency Q2 2006 labour force report:


In Q2 2006 more than a half (63.8%) of residents in the age from 15 to 74 were economically active – this indicator was 68.9% amongst males, and 59.4% amongst females. in the 2nd quarter of 2006, the number of economically active population, in comparison with the corresponding period of 2005, increased by 2%.

These numbers, since they include everyone up to 74, and many under 20 - an age where education may still be taking place in many cases - are really very hard to interpret. But whichever way you look at it there is certainly a problem, since wage increases of this order would normally be considered to motivate more labour to come into the market, were it available. However, before going into this labour market structural bind in greater depth, let's take a look at some more of the details of the general economic dilemma.


Migration As A Solution?

Well given that a strategy of relying exclusively on fiscal tightening and strong deflation (as is being recommended to the Latvian government by a variety of sources) is fraught with risk, another possibility which should be seriously considered would be to apply a determined policy mix of both decreasing the rate of economic expansion and increasing capacity by loosening labour market constraints somewhat via an open-the-doors policy towards inward migration and with the active promotion and encouragement of an inward flow of migrants from elsewhere in Eastern Europe (or further afield). This would seem sensible, and even viable given the fact that Latvia is a pretty small country. However, as Claus Vistesen notes here, this can only be thought of as an interim measure, since, as the World Bank has recently argued, all the countries in Eastern Europe and Central Asia are effectively condemned to face growing difficulties with labour supply between now and 2020 (so in this sense what is now happening in Latvia may be an extreme harbinger of the shape of things to come). But given this proviso it is clear that a short-term inward migration policy may help Latvia escape from the short-term vice it seems to be in the grip of. This short term advantage may be important, since longer term solutions like increasing the human capital component in the economy and moving up to higher value activity need much more time, and what is at issue here is transiting a fairly small economy from an unsustainable path to a sustainable one.

However Latvia certainly faces difficulties in introducing a pro-migrant policy. One of these is that such a process may ultimately put downward pressure on unskilled Latvian workers wages in a way which only sends even more of the scarce potential labour Latvia has out to Ireland or the UK. A recent report by the US Council of Economic Advisers made some of the issues involved relatively clear. The report cited research showing immigrants in the US on average have a “slightly positive” impact on economic growth and government finances, but at the same time conceded that unskilled immigrants might put downward pressure on the position of unskilled native workers. Now in the US cases these US workers are unlikely to emigrate, but in Latvia they may do.

A further difficulty is the lack of availability of accurate data on the actual scale of either inward or outward migration in Latvia (this difficulty is noted by both the IMF staff team and the Economist Intelligence Unit). On the latest estimate from the Bank of Latvia some 70,000 Latvians, or around 6% of the labour force, are currently working abroad - mostly in the UK and Ireland - but the true number is very likely considerably higher (IMF Selected Issues Latvia 2006, for example, puts the figure at nearer 100,000).

Several recent surveys also suggest that the potential for outward migration remains substantial. For example, a survey conducted by SKDS (Public Opinion on Manpower Migration: Opinion Poll of Latvia’s Population) in January 2006 revealed that about 22 percent of Latvian residents see themselves as being either “very likely” or “somewhat likely” to go to another country for work “in the next two years”. Based on the current estimated population, this translates into between 350 and 450 thousand residents (between 15 and 20 percent of the 2005 population). The survey also indicated that these respondents were significantly skewed toward the relatively young (15-35), which would significantly reduce the working-age population and labor force in the near future. These respondents were also slightly more likely to be male, less educated, low-income, employed in the private sector, or non-Latvian.

But there is a second issue which immediately arises in the context of projected in-migration into Latvia, and that is the situation vis-a-vis the presence of large numbers of Russophone Latvian residents who are non-citizens. The issue can be seen in the table below.

(please click over image for better viewing)




Essentially out of a total population of 2,280,000, only 1,850,000 are citizens. Of the remainder the majority (some 280,000) are Russians. And these Russians are not recent arrivals, but they are a part of a historic Russophone population which build up inside Latvia during the period that the country formed part of the Soviet Union.

In fact, if we look at the chart below, we will see that during 2003 the rate of out migration from Latvia seems to have dropped substantially, and given what we know about the post 2004 out migration boom, this, on the surface, seems strange.

(please click over image for better viewing)



The answer to this puzzle is to do with the Russophone population who are not Latvian citizens (and therefore logically at this point not EU citizens either). The majority of the pre 2004 out-migration was actually towards the CIS, and it is reasonable to assume that many of these migrants came from the Russian speaking population. And this process is not over as this recent article from Itar-Tass about a joint project to settle Russian speaking Latvian residents in Kaliningrad makes clear.

So clearly the fact that the Latvian authorities may still be actively considering encouraging the resettlement of Russian speaking Latvian citizens elsewhere gives an indication of just how unprepared the collective mindset in Latvia is for all that is now about to come upon them.

Yet one more time the difference with Estonia couldn't be clearer. According to the Baltic Times this week, Estonian Economy Minister Juhan Parts is busy working on a set of proposals - which before Parliament by November - which will attempt to address Estonia’s growing shortage of skilled workers. The quota of foreign workers will be doubled to about 1,300 and the bureaucratic paperwork slashed . Now it is true that Parts is still to bite the bullet of accepting the need for unskilled workers too, but in the present situation a start is a start, and it is one that Latvia has yet to make.


Incidentally, just in case anyone reading this is interested, I have now established a Latvia Economy Watch blog, to accompany my Hungary Economy Watch one.

WB Report on Demographics in Russia and Eastern Europe - Getting it Right this Time?

The demographics of the Eastern Eurpean acession countries and Russia has been a recurring topic here at DM. Recently, I had a note up on the nature of the economic convergence/catch-up process which I hypothesized would be affected by the fact that the demographic transition in Eastern Europe has moved far beyond the process of economic development. More pertinent in the context of the immediate reference at hand I also had a note up some time ago responding to a World Bank report on migration and remittance flows in Eastern Europe, former Soviet Asia and the CIS. At that time, I was rather critical towards the World Bank report mainly because it did not seem to take into account the general demographic situation in the region as well as the fact that it failed to take into account the obvious (especially in some countries) relative human capital implications of remittance flows.

Now, the World Bank has just published a very comprehensive report on the demographic future of Eastern Europe and Russia entitled From Red to Gray - The Third Transition of Ageing Populations in Eastern Europe and the former Soviet Union. In many ways, this publications implicitly responds to many of the critical points I levied towards the beforementioned World Bank report on migration. In fact, I would say that by combining the two reports you should a very good picture of the general situation in the region. I still have one small quibble though which is contained within the quote below from the lead economist at the World Bank, Gordon Betcherman. The important point is emphasised in bold.

If measures are taken to improve labor productivity, this would clearly outweigh the losses due to a smaller labor force. Output in aging countries can also receive a boost from increases in labor force participation through raising retirement ages and encouraging flexible forms of employment. And politics permitting, shortfalls in labor supply can be minimized by interregional migration.”

Once again as it was the case with the previous report on migration, this is an assumption I am very skeptical on. Perhaps some countries will be able to leverage intra-regional migration to mitigate the structural decline in the labour force but surely not all. Moreover, given the general and universal trajectory of the demographic transition as well as the steady net outward flow of labour from some countries towards the west this remains a very thin hypothesis and assumption I think.

Regarding the issue of intra regional migration and the prospect for countries to leverage this in the future this assumption in particular (from chapter 2 0f the report) is what I am skeptical of ...

The uneven aging patterns across countries mean that intraregional migration can play an important role in boosting labor supply in older countries. The flow of migrants—primarily from Central Asia to Central and Eastern Europe and to middle-income former Soviet countries—could be an important source of income for the sending countries while meeting the labor needs of the receiving ones. An effective framework for regulating both temporary and permanent migration will make this process more efficient and equitable.

Especially, the notion of 'uneven' is odd here I think since whilst this is no doubt true it is also true that almost all countries in the region is set to age rapidly over the next 20 years. In short; it is unclear I think whether in fact those countries who are supposed to supply migrants will want to/can shed the workers when push inevitably comes to shove.

Having said this however I do think that this WB report is much worth while and indicative of the issues at hand. Of particular note I think is in fact chapter 2 (PDF) which discusses the impact of demographic change on the labour market. Here is the general intro ...

Demographic trends can have direct implications for labor markets through three primary channels: labor supply, labor productivity, and labor demand (because of shifts in the structure of aggregate demand). This chapter focuses on the first two. The conventional wisdom is that aging societies will face difficult economic and social challenges because of what will inevitably happen in the labor market - that is, output will be reduced because the labor force will shrink as large numbers of workers retire and because older workforces cannot produce at the level of younger ones. These are legitimate concerns; however, the story is more complex and may be less demographically determined than conventional wisdom suggests.

Especially the outlook to raise what seems to be structurally low participation rates and early retirment age seems to represent a very sound general policy advice on a regionwide scale. Before I sign off I also want to note chapter 3 (PDF) which tackles the issue of ageing, financial markets and saving and thus also the inevitable and very complex question of just how the life cycle pattern of saving/consumption looks and will look in the region. Here is the intro ...

A common view is that aging societies can expect reduced levels of domestic savings because older people save less and that low savings will lead to lower capital accumulation, which, in turn, will depress investment and growth. Where aging is occurring in Eastern Europe and the former Soviet Union, will savings decline and thus constrain economic growth?

Different factors come into play in determining the specific financial consequences of aging in the region. Certainly, there are reasons to question whether the impacts expected under pessimistic scenarios in the older industrial countries will necessarily happen. In the first place, it is not clear how well the age-saving profiles that have emerged from research in those countries apply to transition countries. Not only is there very little analysis of this relationship in the region, but also it is far from clear whether the saving patterns of the past 15 years can be extrapolated into the future.

In the end and even though I have my reservations of the assumptions on the nature of future intra-regional migration this WB report is much worth while I would say so be sure to bookmark it for later reference.

Economics and Low Fertility, Some Stylised Facts

The Economist has an informative and interesting (if somewhat complacent) article on European fertility this week, and I have a pretty lengthy post on A Fistful of Euros which goes through the main issues raised.

There seem to be two central points here is

a) that there is no such thing as "European Fertility", but rather there are various patterns (the Economist divides Europe in two, I try to be a bit more subtle, and distinguish between four groups of countries)

b) that low European fertility cannot be looked at in isolation, since it forms part of what is effectively a global phenomenon, as birthrates steadily drop in country after country across the planet. The situation in China after many years on a one child policy is by now well known, as is the situation which prevails in Japan. Less well known perhaps is that several states in Southern Indian are now with below replacement fertility (and apparently heading down to the lowest-low bracket) as is, for example, Thailand.

Before going any further I would like to stress yet one more time that I am NOT a demographer, but a macroeconomist, a macroeconomist who has simply become interested in demographic processes due to their evident interface with economics.

Now in this brief post I want to address what Europe has in common with what is happening elsewhere, knowing full well that in each and every case there are also "country specific" features.

Various explanations for the generalised below-replacement phenomenon have been offered, some of them social and some economic. Undoubtedly there are a number of factors at work, but for present purposes I want to highlight two points:

i) In some form or another the fertility decline is associated with the process of economic development (one immediately might think here of Becker's child investment thesis, and the substitution of quality for quantity), and in particular what are termed the lowest-low levels of fertility (TFRs below 1.3) seem to be associated with very rapid rates of economic development (the Asian tigers and southern Europe might be considered good examples here). Since the big economic news since the late 90s has been the very rapid economic growth which is taking place in a large wedge of emerging economies, there would seem to be prima facie grounds for fearing that this lowest low fertility level may arrive in an increasing number of countries, and comparatively soon.

ii) The growing disconnect between those countries who fall below replacement level, but then steadily recover ground - typical cases here would be the US, France, the UK, Ireland, and Scandinavia generally (these could be increasingly considered the "outlier", special-case countries, although of course they themselves are a pretty heterogeneous bunch) - and the "other group" (ie the increasingly "path normal" countries) where fertility falls below the (apparently) critical TFR 1.5 level, and then subsequently fails to break upwards again.

Why this latter process of trawling the bottom is the case is in fact the big headache we all face. The persistence of this below 1.5 TFR phenomenon has lead the Austrian demographer Wolfgang Lutz to formulate a low fertility trap hypothesis (LFTH). The first point to make would be that this trap idea is simply a hypothesis awaiting confirmation at this point. Lutz identifies three mechanisms which might be operating in perpetuating the trap:

a) Negative population momentum
b) Ideational factors
c) Economic processes

On the negative momentum situation, one Japanese newspaper recently made the following point:

".... In the future, there is expected to be a phenomenon in which the number of births declines but the birthrate rises. Because of this, some experts say the number of births is a more appropriate measure than the birthrate for evaluating government policies and for setting targets".

Well, this is negative momentum at work. After decades of below replacement fertility the cohort base is continuously reduced and as a result fewer and fewer children arrive (as shown in this recent post on Germany) regardless of anything other than very sizable (and pretty much inconceivable) movements in the fertility rate. It is hard to overstate the corrosive impact of this process on the population pyramid in the longer term.

This momentum factor on its own does not, however, generate a fertility trap, since it does not affect "fertility" directly. However, it may be a factor which has an indirect impact via the processes characterised as (b) and (c).

(b) Ideational mechanisms: the idea here is simply that in an environment where very few children are actually being born, the woman's idea of "ideal family size" may change. Thus the negative population momentum which produces comparatively few children may impact in this way. The phenomenon being referred to in some Japanese media as "parasite single women who adamantly refuse to marry and bear children" may indeed be one example of this process at work (remember, the two child family is in many countries a very recent phenomenon, and with rather few deep social roots), but if indeed something like this does exist in Japan it is only a culturally specific example of a more general process. Around 25% of German women now remain permanently childless.

Economic mechanisms: Well one example of this would be the impact of structural reforms on seniority bonuses in Japan:

"As age-wage curves flattened in Japan, women can no longer marry to become full-time housewives, as in general their husbands' salaries aren't going to rise enough to make for a comfortable living."

I think a long and pretty obvious list of similar economic determinants which influence fertility decisions could easily be drawn up. For the LFTH to work, however, these need to contain an element of circularity (ie they need to be economic processes which are in part driven by ageing and low fertility in the first place), and I think it is not sufficient to draw attention to a phenomenon with a general impact like globalisation.


My own work as a macroeconomist in part relates to this, and I have been pretty focused of late on internal imbalances in the eurozone, and what (if any) relation these may have with differential rates of population ageing as between countries (and, thus, by implication, differential fertility, since those who are ageing most rapidly are those whose fertility continues stubbornly to remain below the TFR 1.5 level).


I think, if we look at the three most "elderly" societies in terms of median age - Japan, Germany and Italy - we can now begin to discern certain "stylised facts":

a) Ongoing weaknesses in domestic consumer demand
b) absence of housing booms (since 1995 in the European cases)
c) Comparatively high rates of personal saving, which then begin to decline
b) Increasing structural dependence on exports for growth
c) Lack of attractiveness as a destination for migrants
d) An increasingly flat wages curve (across time) despite demographically driven labour market tightening
e) Growing government deficit issues and dilemma's about how to fund
health and pension systems, with a tendency to try and load the cost onto the tax system rather than reducing provision.


Now it is evident that there is some variance between countries in the level of "fit" here. Italy for example, has experienced very low economic growth (even during the recent global spurt) precisely because it has (for political gridlock reasons) been unable to make the kind of reforms we have seen in Germany and Japan, and thus has been able to achieve export lead growth. Unfortunately this is bad, rather than good news for Italy. Likewise Italy has been receiving rather more migrants of late than in the past, but at the same time has been having a large human capital deficit on the migrant flows, since the Italian economy simply is not able at this point to generate the kinds of employment which many educated young Italians need, and hence as unskilled migrants enter educated Italians leave. (This has also been happening to some extent in Germany, and I would be very interested if anyone had information on this vis-a-vis Japan).

The main point about the above list - were future data to confirm these trends - is that (as a complex) they all tend to reinforce birth postponement decisions via their impact on the economic well-being of young people. This is especially true of (e), where young people are, via the tax and contributory systems having a growing burden placed on their shoulders. This tendency could become even more pronounced as a majority of voters come to be over 50.

Migration and Economic Growth in the US

One of our themes here at Demography Matters is the idea that inward migrant flows can help ease the pressure put on health and pension systems which results from excessively rapid population change. As I argue here, in the case of Ireland, this is a win-win situation, where a comparatively young population generates a level of economic growth which attracts an inflow of migrants which helps maintain the population as a comparatively young one. At the other end a rather older society like Italy attracts migrants at a somewhat slower pace and is unable to generate enough economic activity and growth to hold on to its own young educated people.

At the heart of all of this is the transition from an industrial to a services economy, and the central role which housing (through both financial services and construction) seems to play in the whole process.

I this context I found this recent Bloomberg article interesting:

The U.S. housing slump is squeezing Mexican migrant workers from Los Angeles to New York, where permits for new home construction are down 20 percent this year, according to the Census Bureau. That's reducing the pace of money transfers, the second-biggest source of dollars in Mexico after oil exports, and turning the peso into a laggard among Latin American currencies.

I found the article interesting since it seems to suggest that movements in construction sector activity are a pretty good proxy for rates of flow of migrant workers (or, of course, the reverse). This point was in my mind following the post I mentioned on the Irish economy, and the role of migration in reinforcing the recent Irish boom. Talk in the Bloomberg article about the reduction in the rate of increase of remittances lead me to start thinking that remittances flows are probably also a good proxy for the intensity of migrant flows (since the most recent migrants tend to send proportionately more, and then the flow tapers off over the years).

Remittances rose 3.4 percent in the first quarter, the slowest growth in eight years. The peso has strengthened 0.1 percent this year to 10.8137 per dollar, the second-worst performance among the most-traded currencies in the region.

Interestingly the article also mentions that:

The number of people caught trying to enter the U.S. illegally from Mexico dropped almost one-third in the first quarter to 265,000, according to U.S. Border Patrol data.

The article mentions the crackdown on migration as one of the reasons for this reduction in the number of people being "caught in the act", but I am not so sure this is such a good explanation. Clearly increased surveillance can act as a disincentive, but so can the lack of availability of employment, and, ceteribus paribus, you would on the face of it expect increased vigilance to produce more, not less, apprehensions.


Now going back to the role of construction in migrant flows and economic growth, there was also this:


The decline in illegal immigrants mirrors the U.S. housing market. Residential construction in the U.S. fell by 17 percent in the first quarter, according to the Commerce Department. The construction industry is the biggest source of work for Mexicans in the U.S., accounting for about 20 percent of jobs, data from Mexico's central bank shows.

The pace of money transfers has moved in step with the U.S. construction industry since the late 1990s, said Dawn McLaren, a research economist at Arizona State University in Tempe. The correlation between the two has become so strong that she uses border apprehensions as a ``leading indicator'' for the U.S. housing market.

So according to Dawn McLaren border apprehensions could now be considered a "leading indicator" for the US housing sector. If this is so, then on recent evidence we should expect the housing market to continue to remain flat. Also, since one of the points I am trying to argue here is that migrant flows represent a non-linear feedback mechanism which reinforce a construction boom, when they slow or stop this will also have non-linear negative feedback consequences for the economy over the mid to longer term (of course, in the current US case the whole issue is about how and when housing activity really picks up again).

So stimulated by Bloomberg I went over to the University of Arizona site and found that Dawn Mclaren has an interesting podcast: The tangled web of illegal immigration -- what do we really know? where she explains many of her principal arguments. I found the following extract - where she explains the "little bit of a demographic problem" that the US is passing through - particularly interesting.

We are not talking about low wage here, we are not talking about minimum wage, we are certainly not talking about less than minimum wage, we are talking about the labor that is necessary. The reason it's necessary is that we have a little bit of a demographic problem.

If you look at over the last hundred years our population of people between the ages of 44 to 64 has grown and grown and grown in terms of a percentage of our total population. And the percentage of people in the 15 to 24 year old age bracket has been declining and declining and declining -- lower and lower percentages over the last hundred years.

Now why is this important? Well, the 44 to 64 year olds make a lot more money. In their life cycle they are making more money than they will after they retire after 65 and certainly more money then they did in their younger years. And the people who have that income want services. They want someone to clean the house, they want someone to cut the lawn, do the landscaping, they want services provided to them.

Now usually, what happens if you don't have our little demographic problem is the group of 15 to 24 year olds, the kids in high school and the ones putting themselves through college and this kind of thing, they will come out and do this type of work. We are not seeing that. That is partly because we are having this little demographic problem, we have got a lower percentage of that population to serve the much higher percentage of 44 to 64 year olds.

Not only that, but we have put them into jobs when they do work, they are working in things that are related to computers like computer help centers. The more skilled, the more knowledge economy-oriented jobs and would it be a good idea to say to them, "Stop doing those knowledge economy jobs and start doing the manual labor."

That has put a lot of pressure on bringing in unskilled labor into the country. That is starting to go away because we are starting to see that percentage ease off so that there are now becoming more 15 to 24 year olds. The housing boom is over so we don't have that same pressure, that intense pressure to bring in labor to do construction jobs. This is easing off a little bit.

Now going back to the main thread of my argument, I am not saying anything especially new here, since Nobel Economist Simon Kuznets long ago identified in the US data what became known as "Kuznets Cycles" - mini-cycles driven by migrant flows with a 10 to 15 year lag. Obviously with financial markets becoming somewhat more efficient the lead-lag times which regulate all of this have probably reduced considerably.

What Kuznets didn't think about, however, was the impact of these flows on age structures and population pyramids. I am now finding myself rethinking just exactly what it was that happened in the US during the 1990s. As we all know there were massive inward migrant flows - 1 million undocumented workers a year from the late 80s on I think. And I am being lead to ask myself: did the US median age actually drop during the 1990s? If it did that would explain a lot of things.

Now thinking about this - and Dawn Mclaren's idea of the "little bit of a demographic problem" - I went over to Ken Gronbach's Changing Demography Blog to take another look at the chart you will find below, where you will see that there have been important structural shifts in the US population over the last 50 years, and in particular the presence of what Gronbach calls the "silent generation" (click over image for a better view).



Now if my central idea is right - ie that migrant flows represent a strong feedback process (or a strong version of what Keynes would have called the multiplier), and that US median age either actually fell during the 1990s (which is an idea that needs to be checked and calculated) - then we have another potential explanation (aside that is from productivity and the arrival of the internet) for what Alan Greenspan called the raised cruising speed of the US economy. At this point, of course, all of this is largely conjecture, but since the underlying idea seems to fit in so well with what we have been seeing here in Europe - in places like Ireland, the UK, Greece and Spain (and in each of these cases median ages have been going down - at least slightly - and not up in the last few years) - and indeed if any of this has any validity it does seem to add some force to my old idea that what central bankers should actually be doing is targeting median ages.

Two Papers on Chinese Fertility

Not too long ago we had a discussion on Chinese fertility and as often before the discussion converged on just what theTFR level is in China as well as the effects of the one child policy. This entry fields two papers which might serve to illuminate these issues. Both papers are from recent issues of Population and Development Review.

The first paper examines the very important point of heterogenity across China in terms of application and effect of the one child policy.

In this article we survey variations in China’s fertility policy as of the late 1990s, in an attempt to describe local policy and the implications of the aggregation of local policies for national policy. Following a brief discussion of the politics of population policymaking in contemporary China, we summarize fertility policy regulations within China’s provinces.1 Our survey illustrates the intricacies and complexities of the population control process in China and serves as a background for our detailed analysis of the policy-stipulated fertility level in China based on local fertility policies. Using data collected on fertility policy for 420 prefecture-level units in China, the administrative level below the province, we estimate fertility levels that would obtain locally if all married couples had births at the levels permitted by local policy. Chinese birth control officials term this fertility level as “policy fertility” (zhengce shengyulu). We compute the average provincial and national policy fertility levels implied by policy fertility at the prefecture level and map the geographic and demographic distributions of policy fertility in China. This policy fertility level is a quantitative summary of China’s current fertility policy, informing what is pursued in terms of population control nationally, on the basis of diverse local policies. Policy fertility serves as a reference for evaluating China’s fertility policy implementation, and as a starting point in evaluating the necessity and feasibility of continuing China’s current fertility policy. (...) Two main conclusions can be drawn from the results of this study, and they seem to provide a glimpse of China’s fertility policy from opposite viewpoints. First, China’s fertility policy encompasses much variation, both geographically and demographically. At both the prefecture and province levels, policy fertility ranges from the one-child rule to a policy that allows two children and more. At the same time, birth control regulations drafted and implemented by China’s provinces allow numerous kinds of exemptions to the one-child rule, based on considerations ranging from the demographic to the political. These results highlight the complex nature of Chinese birth control policymaking and implementation. Both regional and demographic distributions of policy fertility show that the mode of the policy falls into the category of 1.3 to 1.5 children per couple (38 percent of the prefectures and 53 percent of the population, respectively). The majority of the Chinese population (more than 70 percent) live in areas with a policy fertility level at 1.3 to 2.0 children per couple. Second, despite local variations and exemptions to the one-child rule, the one-child policy remains a core element of China’s fertility policy and continues to have an impact on China’s demographic processes. The one-child rule applies to nearly 30 percent of China’s prefecture-level administrative units and to over a third of China’s national population. Moreover, in locales that allow couples with a first-born daughter to have a second child, which contain over half of China’s population, about half of all couples are also effectively under the one-child rule. Should all couples under various policy regimes follow the current fertility policies fully, more than 60 percent of all Chinese couples would end up with only one child. Based on local fertility policies and corresponding population distributions, we estimate that the overall average fertility targeted by the fertility policies for China as a whole is 1.47 at the end of the 1990s. This level is far below replacement.

The second paper examines the options and time scale of a potential fertility transition policy in China and above all notes that abandoning the one child policy is urgent.

This article compares five currently debated scenarios for fertility policy transition in China, in terms of their implications for future population growth and population aging, the proportions of elderly living alone, labor force trends, pension deficits, economic costs, the marriage squeeze, and other socioeconomic outcomes. Based on these comparative analyses, the author concludes that China needs to begin a gradual modification of its fertility policy as soon as possible. He proposes a three-stage "soft-landing" strategy for fertility policy transition: (1) a 7-year initial smooth transition period; (2) from approximately 2014-15 to 2032-35 a universal two-child policy combined with late childbearing in both rural and urban areas; (3) after 2032-35 all Chinese citizens would be free to choose family size and fertility timing. This strategy will enable China to have much more favorable demographic conditions and socioeconomic outcomes, as compared to keeping the current policy unchanged.

Fertility News

In the last week or so there has been a certain amount of "news" in the press realing to fertility and TFRs in three countries: Germany, Japan, and the UK.

First of Germany. On June 5 the Federal Statistical Office published the following:

As previously reported by the Federal Statistical Office, provisional results for 2006 show decreasing numbers of births and deaths in Germany. The population, too, decreased slightly in that period.
In 2006, 673,000 live births were registered, that was 13,000 or 1.9% less than in 2005. The number of births has been declining since 1991, with the exception of 1996 and 1997. The number of deaths had fallen continuously from 1994 to 2001, before it increased in 2002, 2003 and 2005. In 2006, there were 822,000 deaths, which was a decrease by 8,000 or 1% on the previous year. This means that in 2006, there was an excess of deaths over births of about 149,000. In the previous year, the deficit of births was by about 5,000 persons smaller. On 31 December 2006, Germany had about 82,315,000 inhabitants. That was 123,000 or 0.1% less than at the end of 2005 (82,438,000).

Perhaps the most striking feature here is the decline in the absolute number of live births, this is known as the population momentum effect which operates as generations become smaller. Such is this effect now in Germany that the sheer wait of the numbers decline is likely to completely overwhelm any small increase we may see in the level of the TFR as birth recovery takes place among older women.

and remember, migration is roughly 0% now in Germany, with people leaving as fast as they are arriving.

Meanwhile earlier last week the Japanese Health Ministry revealed that the recorded TFR in Japan has rose slightly - to 1.32 babies per woman - in 2006, which up from the record low ever of 1.26 recorded in 2005.

Japan's fertility rate rose last year for the first time in six years in 2006, while the number of suicides fell below the 30,000-case mark for the first time in four, the government said Wednesday.

``The latest figure alone doesn't indicate whether there is a turnaround in the country's recent trend of falling number of births,'' said Emi Sato of the vital statistic division with the Health Ministry.

Japan's fertility rate was 1.33 in 2001, 1.32 in 2002 and 1.29 in both 2003 and 2004 - the lowest figure since the government began releasing fertility rate data in 1947, according to the ministry.

Last year, the number of births in Japan totaled 1,092,662, exceeding the number of deaths by just 8,174, the report showed. Marriages in Japan totaled 730,973 last year, up 16,708, while divorces totaled 257,484 people, down 4,433.

But before everyone starts jumping up and down with joy it should be noted that the increase is very small and that the Health Ministry itself is warning that it may well be in part a statistical construct, with the rate possibly dropping slightly again in 2008.

For those interested in a fuller assessment of the longer term fertility situation in Japan, this article by Toru Suzuki in the March 2006 edition of the Japanese Journal of Population makes a good read:

Fertility Decline and Policy Development in Japan

As Suzuki notes:

The Japanese government was shocked with the TFR of 1.57 in 1989 and launched a variety ofpronatal policy measures.

As he also goes on to suggest the Completed Cohort Fertility Rate (CFR) is a more accurate measure of fertility than the TFR, because the latter suffers from tempo distortion and the so-called "parity composition" effect (for an explanation of some of this we have this post on-site).

And he is none too optimistic that CFRs are going to rebound all that significantly (ie anywhere near replacement) in Japan even in the medium term:

Although the 1955 cohort was behind its predecessor in the early twenties, it succeeded in catch up and will fulfill a near replacement level. However, a significant decline in the CFR for cohorts born after 1960 seems to be inevitable. The cumulative fertility of the 1960 cohort is 1.84 at age 43 and will not reach 1.9 eventually. Though it is difficult to predict the CFR for cohorts born after 1965, the postponement in the early twenties seems too serious to be compensated later. Thus, the CFR of younger cohorts in Japan can be as low as 1.6, which is predicted for Italian cohorts.

Finally, some rather better news from the UK: fertility hits a 26 year high, and the Guardian has this interesting article examining some of the reasons for the rebound:

Women are choosing to have more babies than at any time since 1980, according to official figures which hint at the first baby boom of the 21st century. The fertility rate - the number of births per woman - rose from 1.8 babies per woman in 2005 to 1.87 in 2006, the fifth annual rise in a row and the most babies born in a single year since 1993, the Office for National Statistics said.

The 26-year high in the fertility rate suggests a new baby boom, but is still tens of thousands of children short of matching the post-war baby boomer years. Economists welcomed the news, saying that low birth rates are storing problems for the future when there will be too few taxpayers to support an ageing population, while fertility experts warned that women are risking infertility by having babies later.

The figures suggest that older mothers and migrant families are increasingly making up for younger British-born women choosing to have fewer babies. Keith Spicer, the ONS statistician behind the figures, said: "It's the largest numbers of live births since 1993 and fertility is at its highest in 26 years. The story really is the older mother and the country of the mother's birth."

So while it may be rather exaggerated to talk about a "baby boom" there is a clear and sustained rising in ongoing fertility due to a combination of two factors: birth recovery (that is the older mum factor) and a slighly higher birthrate from migrants.

So good news for the UK, and a stark contrast with the ongoing and largely un-addressed problems which exist in Japan and Germany.

The Nature of the Fertility Trap?

We have certainly been devoting some time here recently on DM to the discussion of the potential drivers of any possible fertility trap which may arise as the TFR of a country drifts below the 1.5 threshold. As a derivative of that debate the discussion also briefly moved over to Alpha.Sources where also the author of the Ape Man blog contributed extensively. Indeed, Ape Man* got so interested that he wrote a large essay in response to my and Edward's musings on the potential drivers of any possible fertility trap. Below Demography Matters would like to present a large extract from this essay. This is being presented here at DM in the form of a guest post, and we do this in the spirit of our emphasis on open debate and the exchange of ideas.

Ape Man has taken the trouble to try and argue against a view that Edward and I have been presenting: namely that societies as they age will increasingly pass through a stage where they become export dependent. Since most commentators seem simply to ignore this issue, an attempt to prove the idea wrong is certainly a welcome contribution to the debate. This, at least, is progress.

Does an aging demographic structure lead to an export-oriented economy?

By Ape Man

As part of their work on the Fertility Trap Hypothesis, Edward Hugh and Claus Vistesen argue that an aging demographic profile will lead to an export-oriented economy . More controversially (at least to me), they argue that a move towards an export economy will make it hard to raise birth rates to replacement levels. They think that the process of moving towards an export-based economy will put pressure on wages of young people which in turn will make them less likely to have children.

Mr. Hugh and Mr. Vistesen's argument revolves around the Life Cycle Model of consumption and savings. The special twist that Mr. Hugh and Mr. Vistesen bring to the idea of the Life Cycle Model is that it can explain things on a macro level based on the demographic profile of the country in question.

Now there are many ideas in the Fertility Trap Hypothesis that I think are quite strong and likely to hold up across all cultures. But I don't think that Hugh and Vistesen's work with the Life Cycle Model will be one of the successful ideas. I see no reason to think that fertility will be negatively affected even if savings/consumption behaves as the Life Cycle model says that they will. In other words, even if the Life Cycle Model holds true across all cultures (a big if, that), the economic effects that will result are not part of the "Fertility Trap."

It's a little bit cheeky for me to say all that. After all, Mr. Hugh is macroeconomist with many years of study. And though Claus Vistesen is still a student, he has done far more studying on this matter than I have. By comparison, my background as an ignorant hillbilly means that my credentials are a little thin for tackling such issues as the Life Cycle Model of consumption and savings and how it relates to demographic age structures on a macro scale.

But Mr. Hugh's response to a comment I made over at Vistesen's blog has stirred up my thinking on the issue. So in between trying to get over sinus issues (otherwise known as the common cold, apeman style), trying to fix my truck, and trying contribute my fair share towards getting a garden in, I have been pondering Mr. Hugh's and Mr. Vistesen's idea.

(...)

So what is my problem with Hugh and Vistesen's idea? It seems so far our little thought experiments have supported their contention that an export-oriented economy is a natural feature of an aging demographic. But that is only half of Hugh and Vistesen's idea. The other half of their idea is that this process would lead to lower wages for young people and thus discourage them from having children. The idea is that this process is self-reinforcing. This is why they want to add it to The Fertility Trap Hypothesis.

This is where I get lost. No matter how I run my little nomad model and no matter what other models I try to create, I simply can not understand why this process should lead to lower incomes for young people. In fact, most of my thought experiments seem to indicate that if any thing, wages for young people should rise.

Now, that is not to say that I can't see other ways that an unbalanced demographic would put downward pressure on wages for young people. Higher health care costs associated with an aging demographic and a universal health care system would be one such example. In that system, cost would be spread over all the workers, but the benefits would be going primarily to the elderly. The effect of this would be to depress the wages of young people relative to wages of previous generations of young people.

But Hugh seems to think that the changing mix of consumption and investment associated with an aging demographic would negatively affect young people. He says….

In order to compete for exports these economies have a permanent pressure on their tradeable sectors, whereby outsourcing is continuous and ongoing, wages are continuously compressed, and structural reform is permanent. Since the very export dependence is only further reinforced by the continuing process of change in the population pyramid (ie domestic demand never "recovers" as such) this is all self-reinforcing. That is the more time passes the more there is downward pressure on the wages of young people.

In a different post Vistesen says…

And this dear readers is where demographics come in and more specifically why we need to look at the population structure of for example Germany and Italy in order to really understand what is going on before our eyes. Why for example is consumer spending persistently low in these two countries and why is Germany running a trade surplus of 6% of GDP.

The common theme in Vistesen's and Hugh's argument seems to be that an ageing demographic will consume less as a percentage of their income and thus younger people will have less job opportunities. But as far as I can puzzle it out, even if you grant their premise, their conclusion does not follow.

Let us go back to my nomad model for a bit. If my little nomad group ships out sheep in return for promises of future support, that is going to reduce the amount of lambs that they are going to get in the coming spring. Less sheep=less lambs.

But this is not necessarily a loss. If you have more sheep than you can efficiently take care of (which is why they want to send sheep away, remember?) then you might have less lambs the following spring anyway. Thus you might not necessarily be losing lambs by sending sheep away.

Now I think that this applies pretty well to a modern economy. All other things being equal, those nations that export capital are going to have a slower growth rate than those who import it. True, you expect to get a return on that exported capital. But in the short term, that return is only a fraction of what you paid out (i.e if you get a 7% return on your money, it is going to be a while before you get your hundred dollars back).

Thus I can accept nations that run trade surpluses will have slower GDP growth than those that don't (all other things being equal). And I accept that slower GDP growth means less job creation (all other things being equal). But how is this a problem for a demographically challenged society?

The problem that leads a demographically challenged society to export capital is that they don't have very many young people. That means they don't need to create very many jobs. But that does not mean that the jobs that they do create pay less. In fact, given that young people have a competitive advantage at many tasks, one would think that a shortage of young people would actually cause their wages to rise. (Granted, older people have a competitive advantage at many tasks as well. But there would be an abundance of them.)

In short, domestic consumption does not have to be as robust in order to provide sufficient employment for the younger cohort in a demographically unbalanced economy.

Hugh argues that trade puts pressure on wages. So, by his reasoning, when you work in exports, your paycheck is always under pressure. I am skeptical of this line of reasoning, but even if it is true that working in exports puts pressure on wages (which does not seem to be the case from what I have read), this is not really an issue related to demographic saving patterns. One would expect that if people in other countries could make something cheaper that it would affect the wages of young people regardless of whether the demographic profile was aging or not.

Hugh and Vistesen's strongest point in their favor is the real world data showing that incomes for younger people have dropped when compared to their parents at a similar age. But this is very misleading data.

The proper data for Hugh and Vistesen to base their claim on would be to compare the total cost to the employer of each hour worked by the younger generation and the older generation at a similar age. I strongly suspect that with the rise in pension costs, health care costs, increased labor regulations, and greater vacation time, that you will find that young people around the world are costing their employers more than their parents did at a similar age. I suspect that this would hold true in Japan and Europe in particular.

To be sure, this does not take away from the fact that young peoples' wages are dropping. And the fact that their wages are dropping could very well be a contributing factor in the lowering of fertility rates. But if young people are costing their employers more than their parents did at a similar age, then I think that you can hardly blame an export-oriented economy for putting pressure on their wages. Instead you must look to those things that are causing their labor to be so much more expensive than their parents at a similar age.

The long and the short of this is that I can see an aging demographic profile leading to a trade surplus. But I don't see this as being something that contributes to "The Fertility Trap." Rather I see it as the last hope of many countries to get out of the "The Fertility Trap." And as the world ages, that last hope is going to fade fast.

---

*(Mind you, Edward and I are referred to as Mr. Hugh and Mr. Vistesen which of course makes the identity of Ape Man somewhat off in comparison, but that is nevertheless the name our friend here goes by in the blogsphere, and as such we naturally respect his wishes. Maybe it is just coincidence, but isn't there some relation somewhere between Bonobos and our earliest ancestors.)

"Can Germany Be Saved?"

While Germany has seen an economic upswing in the last two years a lot of the proposed reforms have been toned down. Longtime readers of this blog will be familiar with Germany's demographic outlook but there a number of issues including social, labour, business, and market reform that still need to be resolved. One of the most prominent critics in Germany is Prof. Hans Werner Sinn, also president of the German Economic IFO institute. Back in 2004 Sinn wrote a book giving an historic overview of how Germany's wirtschaftwunder came to be and how Germany came into the positon it is now in, "Ist Deutschland noch zu retten?" Which, to the dismay of others, took a hard and critical look at Germany's economic problems and what solutions are possible. As they say: "die wahrheit tut weh".


Prof. Sinn has now published an updated english edition available from MIT Press: "Can Germany Be Saved?-The Malaise of the World's First Welfare State". This book is meant for Germany but a lot of the lessons apply to other countries as well. Germany will be the first country to face these challenges but not the last.

What has happened to the German economic miracle? Rebuilding from the rubble and ruin of two world wars, Germany in the second half of the twentieth century recaptured its economic strength. High-quality German-made products ranging from precision tools to automobiles again conquered world markets, and the country experienced stratospheric growth and virtually full employment. Germany (or West Germany, until 1989) returned to its position as the economic powerhouse of Europe and became the world's third-largest economy after the United States and Japan. But in recent years growth has slowed, unemployment has soared, and the economic unification of eastern and western Germany has been mishandled. Europe's largest economy is now outperformed by many of its European neighbors in per capita terms. In Can Germany Be Saved?, Hans-Werner Sinn, one of Germany's leading economists, takes a frank look at his country's economic problems and proposes welfare- and tax-reform measures aimed at returning Germany to its former vigor and vitality.

An introduction with sample chapters can be found at MIT Press.

Polish Fertility

This post is a brief "state of the game" one to accompany our recent material on capacity problems in the Polish labour market. First off, it is interesting to note that there is a debate inside Poland which is begining to wake up to this problem, as the following link from the External service of Polish Radio shows. In fact they make the claim that in 2005 Poland had the lowest fertility in the EU, at 1.24:

The declining birth rate observed for years has prompted the government to come up with a long-term pro-family program, which is expected to encourage women to have more kids. Poland’s fertility rate - that is the number of children per one woman – is the lowest in Europe. In 2005 it was 1.24, whereas the EU average is 1.5, according to a report just published by the statistical office of the European Union – Eurostat.

Actually, it isn't clear that Poland still has the lowest fertility in the EU, since according to the 2006 CIA factbook, by 2006 Polish fertility had sneaked back up to 1.26 Tfr, whilst the Czech Republic was down at the 1.24 level. However - as can be seen from the graph below - whichever way you look at it, Poland has a serious fertility problem, and one which is set to only make those labour shortages currently being experienced worse with time.




Poland's population has been in natural decline since the early years of this century:




“Since 1984 the number of children born in Poland has been decreasing. In 1999, for the first time, the number of deaths exceeded the number of births. We have a truly difficult demographic situation”. A number of factors are at play causing women to postpone childbirth and to have less children. Aneta Seibert from the Gender Equality Coalition explains.

As suggested in the article, one for the reasons for the strength of the decline in Poland has been - as elsewhere - birth postponement:



Since the median age at first birth of Polish women is still in the mid twenties, and thus some way below the current Western European norm of 29-30, it would appear that this postponement process still has some way to run.

But in addition to the general postponement process, there are number of other factors at work, which stem from the traditional nature of Polish society:

“One is very evident discrimination of women on the labor market associated with the fact that that they are mothers or that they may become mothers. There is a very wrong assumption among Polish employers that once you become a mother somehow your qualifications disappear along with your commitment to work.”

and

Another important factor is lack of institutionalized good quality and affordable child care, especially for children under 3. “In Poland only 2 percent of children under 3 attend organized child care while in other countries it’s over 50 percent, similarly with kindergartens.”

Now the response to all of this has been an attempt by the Polish government to give more support to would be parents, the problem is that this costs money, and money is what the Polish government is not exactly flush with given the need to control the deficit and reduce the tax wedge (as mentioned in the last post). So there seems to be a kind of self-reinforcing double-bind at work here.

The government is preparing a comprehensive program of support for the family. Some 5.9 billion US dollars may be spent until 2014 on pro-family measures such as extended maternity benefits, tax breaks for families with several children.

As some of the skeptics claim, all of this may be far short of what is needed, but the question still remains, where is the money going to come from?

The BBC also had an article on the new initiative as well as this more general article on the decline of childbirth in Poland. Essentially the BBC also highlight the missmatch between a rapidly evolving society - and in particular a changing labour market - and the presence of traditional values:

If you asked many people which countries are the most Catholic and traditional in Europe, they would probably answer either Ireland or Poland. And in many respects they would be right. Anna Jurczak, who has six-month-old twin boys. Women's expectations of men are changing, says Anna Jurczak According to surveys, around two-thirds of Poles go to church every Sunday and 70% say that family and children are the most important things in their lives....

So why are family-oriented Poles having fewer babies? It is partly because there is a difference between what people say and what they do. And it is also because Polish society has been undergoing profound changes in recent decades.

First, more and more young people, especially women, are going to college and university.

"Women are becoming more and more demanding. They want to get a job and career first so they're not dependent on their husband later," says 34-year-old Anna Jurczak, who has six-month-old twin boys. "Twenty years ago you had to get married young but in our generation, my friends and I, first of all we want to find a good job and then we can find someone we can love." And women are getting more choosy when it comes to picking a suitable husband, she says.

Another dramatic change came with the transition from communism to a market-based economy. Under communism unemployment officially didn't exist. Now, at 18%, it's the highest in the European Union.

As well as concerns about job security, there is a chronic housing shortage and many young people live with their parents because they cannot afford a flat. The cost of raising a family is also increasing.Another reason why women are reluctant to break their career to start a family is because they fear they won't be able to get their jobs back after taking maternity leave.

Finally, I think one think needs to be borne clearly in mind here. Any success in nudging fertility back up again using the kinds of measures which are presently discussed will only have any kind of impact on the labour market in over 20 years time, and in the meantime the brunt of the labour shortages problem I spoke about in the last post is really going to lock in between now and 2020.

Which isn't to say that you don't need to address the low-fertility issue, but simply that this alone isn't going to be enough.

Poland, Is The Party Over?

Claus has been posting on some of the macroeconomic capacity issues which face the East European "Lynx" economies in the light of massive demographic exodus that has taken place in some countries in this group in recent years.

I had long meant to post about this article from the Financial Times, which drew attention to the way in which young university graduates have been leaving Poland, and in particular Eastern Poland, in very large numbers:

Poland has seen one of the largest peacetime migrations in history as about 1m people, many of them young, have moved west to find work, although there are no hard official numbers. There are estimated to be 250,000 Poles in Ireland, about 500,000 in Britain and more than 600,000 in Germany.

While those numbers include doctors, plumbers, welders and office workers, a large number of migrants are young people fresh out of university looking for foreign experience and wages four or five times higher than they could earn at home.

Sitting in the Jadlodajnia Filozoficzna (which translates as the Philosophical Diner), Beata Tymkoff says that the effects of the migration have been even more dire in eastern Poland, where wages are lower and where there are very few foreign investors. In Lublin, in Poland's north-east, "the nightlife there died. Everyone left," she says. "The bands that played there and the people that listened to them, they're all gone."

The missing clubbers are recently graduated 20-somethings, a generation that in former times would have been enjoying its first pay cheques. Their migration is causing labour shortages, even though Poland's official unemployment rate is 14.9 per cent, the highest in the EU. The real rate is probably much lower once people working at home or abroad but still officially on the unemployment rolls are discounted. Many others, particularly former workers at now dissolved collective farms and older miners and workers in communist-era heavy industries, are often unemployable.

So the key issue here is what is happening to Poland's human capital stock? As the Polish economy grows and this stock steadily diminishes, something somewhere is going to hit a limit. (Same story - even if on a rather gentler scale - Italy, and same story Serbia, to name only two more cases of what is now evidently a very general problem).

The article tries to end up on a rather positive note:

"If Poland's young migrants return home, attracted perhaps by rising wages and increasing demand for their labour, they'll be able to find the same kind of music they partied to in London, Glasgow and Dublin."

As they say, if they return home. The if in question is rather a big one it seems to me. Especially since the level of wages necessary to attract people back would be unthinkable in terms of the kind of slow and steady economic development which Eastern Europe needs in the medium term.

Coincidentally I came across this article on Poland in Bloomberg this morning. In particular there is this:

Poland must cut labor costs urgently to halt emigration, lift employment and avoid a slackening of economic growth, Deputy Finance Minister Katarzyna Zajdel-Kurowska said.

The nation must end the ``vicious circle'' in which employers face growing difficulty finding workers as people leave for jobs abroad and the unemployment rate remains the highest in the European Union, Zajdel-Kurowska said in an interview on May 31.

and then this on the state of the budget deficit:

Poland must maintain fast growth to bring down the debt burden and reduce the budget deficit to 3 percent of gross domestic product, meeting euro-adoption criteria laid down when it joined the EU in 2004.

The ruling Law & Justice party plans to cut employees' contributions to social welfare funds by 3 percentage points this year and by a further 2 percentage points next year. Employers' contributions will be cut by 2 percentage points.

``The most clear bottleneck in the Polish economy is the labor market as still-high labor taxes and high social spending do nothing to encourage greater participation,'' said Thomas Laursen, the World Bank's chief economist for the European Union's eastern members, at a press conference in Warsaw on May 31. ``There's not much you can do about emigration, but there's a lot you can do to address the situation on the Polish labor market.''

Unfortunately however the migration and the high level of social spending may well be interconnected, at least in the longer term, since with very low fertility - 1.2 Tfr - increasing life expectancy, and a hemorrhage of population in the middle age groups, the burden of meeting the health and welfare costs of the elderly will fall on an increasingly smaller proportion of the total population.

And of course the pressure to reduce the "tax wedge" which weighs down on job creation is meeting with strong resistance from some quarters:

Junior coalition partners Self Defense and the Polish Families League, will not support the cuts in costs as they want the money to be spent on wage increase for physicians, teachers and other groups threatening strikes for higher pay. The average salary in Poland is a fifth of the EU average. The unemployment rate was 13 percent in April.

In addition there is obviously now a growing skills and age mis-match. As Claus indicates some 20% of GDP still comes from agriculture, but this is produced by a population with relatively low educational levels, and after the migration, an increasingly elderly one. The same may be true of the 13% of the population which is currently unemployed. Although many of these workers could be employed in the lower skilled occupations typically occupied by migrants in a West European or United States context, and for West European and US wages, there may well be cultural and other resistance to them doing this in the Polish context and for Polish wages. Of course part of the solution would be to maintain sufficient levels of economic growth to attract inward migration in the way Spain and Ireland have done. But to be able to sustain the necessary growth Poland needs to move steadily up the value chain in terms of the profile of economic activities being undertaken. But this is just what is going to become very, very difficult to do given the recent brain drain of the young and educated.

So there is, it seems to me a growing problem here, one which is touched on in the following assessment made by the Polish Economics Ministry:


The Economy Ministry estimates that GDP may be lower by about 400 billion zloty through the year 2025 because 2 million Poles have emigrated since May 2004 and others will follow. As many as 3 million people are considering leaving in the coming years, according to a May 15 survey by IMAS Intl. for Rzeczpospolita.

Now I think any assessment at this point of GDP so far out into the future is a pretty thankless exercise, but the view expressed does at least recognise that there is going to be a problem, even if no one really knows quite what to do about it.