Implications and Opportunities in the Context of an Aging Workforce
In a recent research report from The Conference Board, “Turning Silver Into Gold: Tapping into the Mature Workforce to Close Europe’s Widening Talent Gaps,” authors Marion Devine and Ilaria Maselli examine the impact of shifting demographics on the labor supply in Europe, and explore how policy makers and employers can adapt. While the report is focused on the European labor market, the findings have implications for other economies.
Economic growth, in simple terms
Ilaria Maselli has been studying labor markets for a decade. “The simple understanding about economic growth is that you can grow by adding more people, more hours, or more capital,” she explains. “This is what countries do in the early stages of development.”
At the later stages of development when an economy “can no longer add many more hours, much more capital, or more people into the labor market,” Maselli says, “then you need to grow by productivity: you need to grow by adding ideas, by making your processes more efficient.” And this, she says, is very difficult. “This is the challenge, in general, of all advanced economies: economic growth in the future has to come from productivity.”
Slowing Population Growth and an Aging Workforce
Low fertility is now a global phenomenon. Demographers say the fertility rate needs to reach 2.1 children per woman just to replace people dying and keep populations constant. According to 2015 data from the UN, nearly half the world lives in countries with below-replacement level fertility rates. This means that population ageing will continue at a fast pace.
More and more countries now have fertility rates below the level required for the replacement of successive generations.
“Population aging is a global challenge,” Maselli says. “All the mature economies have an aging problem, and some emerging markets have an aging problem, too. There are some countries where this is particularly advanced. Germany and Japan, for example. At some point, all countries will get there.”
McKinsey Global Institute’s January, 2015 report Global growth: Can productivity save the day in an aging world? is focused on the G19 and Nigeria, and shows “employment prospects vary significantly. The number of employees has already peaked and started to decline in Germany, Italy, Japan, and Russia; their labor pools could shrink by up to one-third by 2064. In most other countries, employment is likely to peak within 50 years. In China and South Korea, the peak is expected as early as 2024.”
In Europe, “the population of those of working age (15-64) reached its peak in 2015 at 333 million people. Every year this number is projected to shrink by almost a million,” according to The Conference Board report.
The Impact of a Shrinking, Aging Workforce
During the twentieth century, Maselli explains, “labor productivity increased due to innovation. After that, it became quite flat, despite all the innovations of the last decade. Despite all the expectations we have of the digital transformation, we only start to observe now timid signs of a possible reverse.”
Without an acceleration in productivity growth, the rate of global GDP growth is set to decline by 40%.
Which makes even more important the effort to increase labor participation, the percentage of the population that is active in the labor market—either employed or willing to work.
“If we don’t have enough people, and if people don’t become more productive, our economy will just shrink,” Maselli says, with urgency. Many economists attribute up to a third of economic growth to more people joining the workforce each year than leaving it.
According to the World Bank, the world labor participation rate has declined from 66.5% in 1990 to 62.8% in 2016. This drop in labor force participation rates concerns economists because it depresses economic growth, increases the burden on social support programs, and reduces the tax base.
Working age populations in advanced economies, particularly in Europe, are in decline, but the size of the working age population may be less important in the medium-term than that labor pool’s participation rate. According to the TCB report, “on average, 72.5 people in the EU are working for every 100 in the working-age population, a percentage that varies widely by country and by demographic subgroup. On average, just over half of those 55-64 years old are working.”
In Europe and perhaps other regions, the combined labor shortage and relative size of the 55+ older worker population may present an opportunity.
Retaining and Reclaiming Mature Workers
According to The Conference Board Turning Silver Into Gold report, “It appears there is much scope for improvement in the retention and deployment of 55+ workers. The sobering reality is that despite the importance of this growing cohort, many mature workers are still being lost to the European workforce or not employed at their full potential due to skills gaps or age discrimination.”
Maselli observes that though mature workers have a significant role in raising productivity, much of the research and media focus has been on the younger generations. “What I often found funny is that the human capital practice tends to focus on Millenials. But if you look at statistics you can see that the group of 55+ is much bigger part of the labor market in nearly all European countries. So that’s what we should be talking about. That’s what we should make strategies around.”
Barriers to building strategies around the mature workforce include the perception that mature workers’ skills are obsolete, they need to move aside for the next generation, or they are past being meaningfully productive.
According to the World Health Organization, “there is no physiologic reason that many older people cannot participate in the formal workforce, but the expectation that people will cease working when they reach a certain age has gained credence over the past century. Rising incomes, along with public and private pension systems, have allowed people to retire based on their age rather than any health-related problem.”
European governments have been working to postpone older workers’ retirement with a measure of success, but getting mature workers to remain in or return to the workforce also requires the commitment of employers. According to The Conference Board’s research, “employers appear to be slow to change their practices, and too many talented mature workers are exiting the workplace prematurely. Even when they stay, their competences are often not fully leveraged.”
“It’s really a missed opportunity, because people want to remain engaged,” Maselli says.
Maselli observes that the needs and wants of millenials and mature workers aren’t that different. “What my colleague noticed while she was working on a report on millenials, is that if you look closer and if you abstract from the hype, what you discover is people from different generations really don’t want different things.”
Those things include flexibility, training and professional development, and a feeling of purpose.
Mature workers and productivity
Aging experts identify the macroeconomic impact of an aging population in both a higher old-age dependency ratio—a decreasing workforce has less capacity to cover the needs of those who have already retired—and a higher concentration of older workers, which may translate into lower productivity.
Workers with jobs that require physical exertion seem likely to become less productive as they age, but some roles are age-neutral, and mature workers with occupations that require more education and experience may actually become more productive with age.
Research from the Munich Center for Economics and Aging, “Productivity and age: Evidence from work teams at the assembly line,” bears this out.
The 2007 study allowed researchers to estimate “rather precise age-productivity profiles at the individual level and at the level of a work team. These profiles do not show a decline in the relevant age range between 25 and 65 years of age. On the individual workers’ level, our average productivity measure actually increases monotonically up to age 65.”
The researchers also conclude that even in a role that requires physical strength, “its decline with age is compensated by characteristics that appear to increase with age and are hard to measure directly, such as experience and the ability to operate well in a team when tense situations occur, typically when things go wrong and there is little time to fix them.”
In many cases, mature workers possess valuable institutional knowledge that companies would not want to lose. In addition, mature workers in advanced economies are much more likely to be educated, better suiting them for higher-skilled work. They may be ideally suited to help fill the talent shortage in Europe and elsewhere.
Is technology the answer?
For certain geographies, the answer to talent shortage is technology. “Japan is more interesting because there is almost no migration into Japan. They don’t want to solve the aging problem by importing workers from other countries,” Maselli says. “So this means for them it’s even more difficult to keep the labor force constant. I think they are the ones who are pushing robotics as much as possible, but I don’t see, even in Japan, the evidence that this will solve the problem.”
“Our research suggests that companies urgently need to consider how best to manage an aging workforce—because the challenge is here and now and not sometime down the road.”
Often when Maselli and her colleagues give talks about retaining and leveraging the mature workforce, someone brings up technology. “Whenever we go out to talk about this, always somebody raises their hand and says “yes, but do we really have to do this, because our understanding is that robots will replace all of us at some time.” There are technological barriers that we are not going to be able to overcome in the near-future, and the problem with labor supply—we have to do something now.” She adds “this ‘future’ might come quite late.”
Maselli recognizes the strides made in Europe to keep mature workers in the active labor market. “I think Europe is leading, because here in Europe we pushed the retirement age, and we really convinced people to stay in the labor market.” She say, however, “the driver for pushing retirement age is mostly public policy. The other part of the story should be that companies keep people productive in the late stage of their career.”
The solution, according to the report, may be strategic workforce planning that includes tailored work arrangements, healthy, age-friendly work environments, and engaging workplaces.
“When we started talking to people in this age bracket,” Maselli says, “we realized they were just parked, doing something useful but not to the maximum of their potential. They were without opportunities to train someone in their skills, to give advice, to take some training. They were just put in a corner waiting for their retirement,” she says. “But their wish was to remain productive.”
The business case for retaining and recruiting mature workers and investing in their productivity will ultimately become a source of competitive advantage.
Researchers continue to examine global demographic and labor market trends and how markets can sustain the global economy. According to McKinsey, among the activities that would contribute to fueling long-term growth is to “put in place regulation and social support to boost labor-market participation among women, young people, and older people; and improve education and matching skills to jobs, and make labor markets more flexible.”
Maselli’s latest research is focuses on Europe, but she has a global perspective. “A lot of the world’s GDP is produced by and bought by people in advanced economies, and all advanced economies are actually seeing this issue of aging. So the share of economies that involved is big enough to have major consequences on the world economy.”