Peak workforce: How should Europe afford the future? Part 1

It is popular to talk about peaks, such as peak oil – the point in time when the maximum rate of global petroleum extraction is reached. But there is one important peak that there has been surprisingly little discussion about. That is peak workforce.

Demography has profound effects on the economy. As The Economist’s Buttonwood columnist importantly points out, a smaller workforce in absolute numbers will make the huge nominal government debts of today much harder to repay. Sluggish nominal GDP growth due to a diminishing labour force will not reduce nominal debt.

And as this blog argued the other day, the ratio of the total population who are in working-age, and thus capable to work, affects the possibility to provide for those who cannot or do not work.

Based on historical data for the past six decades years and based on projected data for the next six decades in Europe, it turns out that we, at the moment, seem to live in the best time of our lives, with respect to these demographic parameters.

Europe will not in the future see a workforce as large as the one today, and we are set to see a diminishing share of the population who are in working-age. If the projections are correct, the smaller labour force could have severe negative effects for all the European countries that are now heavily indebted. As stated, fewer people in working-age do not bode well for nominal GDP growth. Furthermore, the projected decrease in the share of the total population who are in working-age implies that, in the coming decades, the people who do work will have to work longer or more productively to provide for the growing share of people who do not work.

These demographic dilemmas pose a very relevant question: How should Europe afford the future?

(Feel free to use this figure for your own purposes, but please do not forget to mention the source, which is this blog.)

Simon Hedlin Larsson