What do demographic changes mean for labor supply?

When a population ages, birth rates change, or migration patterns evolve, labor supply also undergoes transformations––affecting a country’s economic growth. Demographic shifts play an important role in shaping the labor force of any nation. This blog explores the intricate relationship between demographics and labor, examining current trends, implications, and policy considerations for economies worldwide.
 

Current demographic trends

According to the UN World Population Prospects 2022 report, there are three key demographic trends that affect labor supply:

• Globally, the pace of population growth is slowing, with notable differences across countries and regions. For example, Sub-Saharan Africa is expected to contribute more than half of the anticipated global population increase through 2050, with the least developed economies being among the fastest growing. On the other hand, Europe and Northern America are projected to reach peak population size and begin population decline in the late 2030s. By then, Asia is projected to house close to 5 billion people and Sub-Saharan Africa, 2.1 billion.
• The population of senior persons is increasing in numbers and share of the total. Among high-income economies, aging population has become increasingly evident. Japan is a well-known example, with close to 30 percent of its population aged 65 years or older. In 2022, almost 20 percent of the population in Europe and Northern America was 65+, followed by Australia and New Zealand (17 percent), and Eastern and South-Eastern Asia (13 percent). The number of senior citizens across Sub-Saharan Africa is also rising, expected to reach five percent in 2050 (up from three percent in 2022).
• Across most of Africa and Asia, working-age population is increasing. The share of working-age population (aged 15–64) is closely related to the active labor force in a country. Among most developed economies, the percentage of persons of working age has stabilized or started to decrease. While Europe has experienced negative rates for over a decade, in much of Africa and Asia, and parts of Latin America and the Caribbean, working-age population is increasing. Not for too long, however––by 2040 it is projected that both Asia and Latin America and the Caribbean will join Europe in the negative rates (figure 1).
   

Figure 1: Working age population, aged 15–64, growth rate (percent)

Source: World Population Prospects 2022.
 

Implications for the labor market

The changing demographics can affect employment dynamics, wages, and overall economic productivity. For example, in economies where the working-age population is shrinking, the cost of labor could increase, as there will be fewer people available to work. Certain industries may also face skill shortages as the demand for skilled workers may outstrip the supply, which could increase the wage premium for skilled labor. Facing a potential shortage of labor, industries may turn to technological innovation and automation to maintain productivity levels. While this can lead to increased efficiency, it also raises concerns about job displacement and the need for reskilling workers, including the elderly, as there may be a need to keep them in the workforce.

On the other hand, in economies with an expanding working-age population, there is a window of opportunity for accelerated economic growth. Known as a “demographic dividend,” all things being equal, the available labor force is larger than the dependent, non-working population, thereby creating more output and making more resources available for investments in human capital, including education, health, employment, and social protection. But note that this window of opportunity is limited, and the benefits may not be realized immediately, as young people need time to learn new skills to contribute to more productive economic activities, which in turn could generate more growth.
 

Policy Recommendations

To address the challenges posed by demographic changes on the supply of labor, here are three policy considerations that governments may consider in their efforts to maintain a resilient and adaptable workforce:

• Support labor markets: Governments can support labor markets by keeping labor costs low. While labor market regulations are very important to protect workers’ rights and support equity and social cohesion, overregulation can discourage job creation and constrain the movement of workers from low to high- productivity jobs. Labor market regulations could be set in a more flexible way, allowing workers to enter formal markets on different types of contracts and arrangements. Excessively protective regulations could push younger workers, women, and minorities into the informal economy, leave them unemployed, or force them to emigrate. This could create non-optimal use of resources in an already constrained, and possibly unequal, domestic environment.
• Promote education and (re)training: Governments can consider enhancing public employment centers to provide training and reskilling programs for workers, including elderly and underrepresented groups. Most countries have public employment centers which could be better leveraged to bridge the needs of employers and workers. For example, on January 1, 2024, France announced the establishment of a new public employment operator, France Travail, building on the experience of the previous public employment agency, Pôle Emploi. The aim of the new entity is to serve as a one-stop shop for all people, including recently graduated, seniors, and people with disabilities, looking for work.
• Flexible retirement policies: Explore flexible retirement policies that encourage older individuals to remain in the workforce, if they wish to do so. This can help mitigate the impact of an aging population on labor force participation and provide valuable experience to industries. For example, in 2022, Singapore changed the law on minimum retirement age and reemployment to give employers a bigger pool of talent to choose from.

The World Bank’s upcoming flagship publication Business Ready (B-READY) will provide data on labor regulations and public services from the perspective of both enterprises and employees. The report aims to help governments to confront these challenges with reliable data and information. Follow B-READY on LinkedIn to get the latest updates.