Aging Germany lacks a workforce, putting Europe’s largest economy at risk

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BERLIN — Germany has long been at the forefront as a source of technical and manufacturing innovation. Now it is driving much of the developed world to a demographic cliff that could put the brakes on Europe’s largest economy, increasing pressure on its pension system and driving up inflation for years to come.

Economists predict that the German workforce could peak as early as 2023, then shrink to five million people by the end of the decade. As the pandemic has exacerbated the trend, it is the impending retirement of baby boomers that is fueling the labor shortage, economists say.

At Jänicke GmbH & Co.KG, which builds swimming pools and heating systems, up to five of its 17 employees are expected to retire in the next few years. To replace them, the company, located about sixty kilometers south-west of Berlin, is already looking for new candidates since they must undergo a three-year training course. It turns out to be a challenge.

“It’s really hard to find artisans these days,” said Anja Jänicke, the company’s human resources manager who spends her days contacting local schools and maintaining an Instagram page to attract new hires. “And looking forward, it certainly doesn’t look like it’s going to get any easier.”

Germany was one of the first in Europe to experience a sharp drop in the birth rate after WWII, as early as the 1970s. This means that its fate could be the shape of things to come for other mature economies. who are still behind the demographic curve.

According to the Bureau of Labor Statistics, the U.S. labor force is expected to grow to about 170 million by 2030, up from 161 million last year. After that, however, most baby boomers would reach retirement age, which would cap labor force growth.

Germany wants to encourage its citizens to work longer before they retire and to liberalize the rules for migration and citizenship.

The crisis could upset some of the basic premises of current economic policy after successive governments in developed countries have focused on creating jobs to avoid unemployment. In a world where labor is scarce, economists say policymakers will need to focus more on stimulating growth and fighting inflation, an economic scenario more reminiscent of the stagflation of the 1970s.

“The standard of living will not be able to rise as usual, unless countermeasures are taken,” the German Economic Institute said in November. “Politicians and businesses are now called upon to avoid prolonged stagnation. “

The new German coalition government led by Chancellor Olaf Scholz sees the labor shortage as one of the main obstacles to economic growth. The administration seeks to increase the participation rate of women in the labor market, to encourage workers to stay at work longer before they retire, and to liberalize migration and citizenship rules. The government will offer courses to help migrants in their integration and facilitate rapid access to schooling for their children.

German companies are already struggling to fill positions, with many offers offering perks such as subsidized meals or on-site nurseries as well as financial incentives to keep older workers longer. At the start of the fourth quarter, a shortage of skilled workers hampered business activity for 43% of German companies, according to a survey by public development bank KfW and economic think tank Ifo, the highest rate since reunification from Germany in 1990.

To attract workers, the city of Hoyerswerda in East Germany, where the population is already shrinking, is organizing a bus tour called “Late Shift” where young people and their parents wear yellow helmets and visit engineering companies. of the region.

“We have to do something because there are a lot of people who are going to retire soon,” said the mayor of Hoyerswerda, Torsten Ruban-Zeh. “And the young people who should replace them are just not there.”

Cultural and societal trends compound the problem. Germany already has the lowest number of hours worked per person per year in the Organization for Economic Co-operation and Development. Part of the reason is that many Germans take early retirement and receive generous retirement offers.

The rate of participation of women in the labor market, meanwhile, at 57% in 2019 against 67% for men, is lower than that of the United States and some other European countries, according to data from the OECD.

Many women reduce their working hours after childbirth due to the limited availability of childcare services and tax-sharing rules, according to Deutsche Bank, which allow couples with large income differences to be taxed at a lower rate as a couple than they would be as individuals. Economists have long said that the rule discourages women from re-entering the workforce full-time because they would be taxed more.

German companies offer benefits such as subsidized meals or financial incentives to keep older workers longer.

The implications of the demographic deficit are considerable.

That could push the potential economic growth rate below 0.75% as early as 2025, compared to nearly double that rate before the pandemic, according to Deutsche Bank. This, in turn, would dampen cyclical resilience – the economy’s ability to absorb economic shocks – and make debt settlement difficult, according to the bank.

Demographic problems also threaten to make the German cherished pay-as-you-go pension scheme unsustainable. The state is already supplementing it with tax revenue, but economists say higher contributions and lower payments will soon be needed. Germany is spending more than 100 billion euros, or $ 112.87 billion, or the equivalent of about a quarter of its federal budget, on this program, a level that could reach half the budget by now. 2040, according to Jörg Krämer, chief economist at Commerzbank.

“We are not already spending enough on investments, so it would be a disaster,” said Mr Krämer.

Economists also warn that inflation, a historically sensitive topic in Germany, could rise as a reduced supply of labor drives up wages, adding another big bottleneck in an economy where manufacturing is currently suffering. shortages of chips, steel, building materials and rising energy prices.

“There are good reasons to assume that the deflationary trends that we have seen over the past 30 years because more people entered the workforce could be reversed,” said Fritzi Köhler-Geib, economist in head of KfW. “With the baby boomers soon to be retiring en masse in Germany, this will be a problem here. “

To close the widening demographic gap, Germany needs more than 400,000 net immigrants a year, according to estimates by the country’s Federal Employment Agency. However, economists expect half that level amid limited social and political will to accept heavy immigration in the aftermath of the 2015 refugee crisis. Language, professional qualifications, and bureaucratic barriers are also a concern. obstacles.

Only 16% of companies surveyed rely on recruiting skilled workers from overseas, according to a study of 7,500 executives by think-tank Bertelsmann Stiftung published last month.

Welder Joachim Schneider, who says the job market in Germany has not been so tight for almost 30 years at the company, is open to hiring foreign workers, although he sees some challenges for them. to integrate.

“Language can be a problem and training and education abroad are different,” said Mr. Schneider, owner of Otto-Schneider Werkzeuginstandsetzung GmbH in Dresden. “And there is also prejudice, foreigners are sometimes seen differently here.”

No sector of the economy is spared from the impending shortage, with many government workers set to retire over the next decade and IT specialists already in short supply.

In Hoyerswerda, Ruban-Zeh said he hoped that Russian and Kazakh doctors and caregivers in Afghanistan and Syria could help fill the health sector deficit. The Federal Employment Agency also signed an agreement with Indonesia in August to recruit local nurses who will undergo language and vocational training in Indonesia for several months before moving to Germany.

The German Foundry Industry Association says around a third of its experienced skilled workers are set to retire in the next few years, but there are currently fewer applicants than positions. The association runs campaigns on TikTok and Snapchat and uses virtual reality headsets to promote the industry to young people.

At Jänicke, an employee made a selfie video while walking around a construction site and talking about his job.

“Have you thought about training as a craftsman? But you were thinking, ah, it’s all dirt and haul and garbage? Well, that’s completely outdated. We are now working with modern tools and laser technology, ”said the video, which the company posted on its social media pages. “It’s fun to make money this way. “

Write to Georgi Kantchev at [email protected]

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