Aging population and effects on labour market

Available online at www.sciencedirect.com Procedia Economics and Finance 1 ( 2012 ) 356 364 International Conference On Applied Economics (ICOAE) 2012 Aging population and effects on labour market Andreea Claudia Serban* Academy of Economic Studies, Bucharest, Caderea Bastiliei St, no.2-4,010611, Romania Abstract This paper analyses the influence of demographic conditions on labour market, including also in the study the impact of education. The aging and decreasing population prospects require special attention due to the pressure added on the social security systems. An older labour force is less adaptable to the changing conditions of globalization. Our findings suggest that the effects of unfavourable demographic conditions on labour market can be partially over passed by education in all developed and developing countries all over the world, but especially in European Union. This could imply a growing activity and occupation rates that create resources for supporting the next generations of older but more educated people. 2012 Published by Elsevier Ltd. Selection and/or peer-review under responsibility of of the the Organising Committee of ICOAE 2012 Keywords: aging population; education; old age dependency ratio; exit age; long-term unemployment 1. Introduction One of the most important characteristic of demography is aging and decreasing population. All European Union countries face these problems with different intensities from one region to another. We intend to make an analyze of demographic conditions in European Countries, especially in Romania, to see which are the * Andreea Claudia Serban. Tel.: 0040723515753 E-mail address: andre_serban@yahoo.com 2212-5671 2012 Published by Elsevier Ltd. Selection and/or peer-review under responsibility of the Organising Committee of ICOAE 2012 doi:10.1016/s2212-5671(12)00041-x

Andreea Claudia Serban / Procedia Economics and Finance 1 ( 2012 ) 356 364 357 effects that should be considered when we refer to increasing dependency ratio and social security systems, occupational structure and long-term unemployment. Considering labour market, an aging population is also an important source of rigidity, a factor that disrupts the good functioning of the labour market. Under condition of increasing competition and globalization, the rigidity becomes a matter of adapting to rapid economic changes. This paper also analyzes the importance of education in solving the problems of aging and decreasing population. Education should be viewed not only as formal education but as education for the whole life, should be viewed as lifelong learning. An increasing share of (working) population should be included in lifelong learning in order to quickly and better respond to the needs of current society that implies a technological advance faster than ever. 1.1. Demographic evolution The most important change in demographic situation in European Union is the transition towards a much older population and a rate of population growth that has been gradually slowing down in recent decades. Although the population of the European Union as a whole increased in 2011, the population in seven Member States was already declining (Bulgaria, Germany, Latvia, Lithuania, Hungary, Portugal and Romania). The population of European Union grew by 13,7 million people in 2010 due to net migration (8,6 million people) and natural change (5,1 mil. people), but compared to previous years, both components (net migration and natural change) decrease. Unlike European Union, in Romania population decrease in the last years, the main reason for this change being the natural decrease (the negative difference between live births and deaths). Total population 1960-2060 (mil. pers.) 600,0 500,0 400,0 300,0 482,8 501,1 514,4 522,3 525,7 524,1 516,9 470,4 457,0 435,5 402,6 23,2 22,1 22,5 21,5 21,0 20,1 20,3 19,4 18,3 18,5 17,3 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 30,0 25,0 20,0 15,0 European Union (X Axis) Romania (Y Axis) Figure 1: Evolution of total population, European Union and Romania (Source: Eurostat Statistics, demo_pjan, proj_10c2150p) Figure 1 presents the evolution of total population in European Union and in Romania between 1960 and 2060 (level registered till 2010, projection made by European Commission from 2020 to 2060). In European Union population will continue to grow till 2050, but with a decreasing rate. Demographic situation in Romania shows a constant decrease in total population starting 1990. This situation is the result of aberrant demographic policies from the last decades of the last century referring to the right to abortion and contraception, the planning of birth rate, restrictive legislation on divorce and financial penalty for people without children. Under these circumstances, the repeal of restrictive measures in 1990 led to a reversal of the birth rate in the next years. It is important to mention that demographic changes in Romania after 1990 were also influenced by the economic and social crisis that characterized most of this period and by entitlement to free movement.

358 Andreea Claudia Serban / Procedia Economics and Finance 1 ( 2012 ) 356 364 While the population of the European Union is growing, the age structure of the population is becoming older due to increasing life expectancy and low levels of fertility sustained for decades. The share of older persons in the total population will increase significantly in the coming decades, as a greater proportion of the post-war baby-boom generation reaches retirement. This will, in turn, lead to an increased burden on those of working age to provide for social expenditure required by the ageing population (European Commission, 2011). Figure 2 shows the distribution of population by age groups in European Union and in Romania. The share of old people increase in European Union from 14% in 1990 to 18% in 2010 and to a projection of 30% in 2060. In Romania the trend is the same but the aging will be more rapid till 2060 due to the generation from the 80s of the last century. Considering this, in 2060, 35% of total population will be 65 years or older. Demographic projections, European Union 100% 80% 60% 40% 20% 0% 3% 3% 5% 6% 7% 9% 11% 12% 11% 12% 13% 14% 17% 18% 18% 18% 60% 61% 61% 59% 56% 54% 52% 51% 27% 24% 21% 21% 20% 19% 19% 19% 1990 2000 2010 2020 2030 2040 2050 2060 over 80 years 64-79 years 20-64 years 0-19 years Demographic projections, Romania 100% 80% 60% 40% 20% 0% 2% 2% 3% 4% 9% 5% 7% 11% 9% 12% 13% 13% 15% 18% 21% 22% 58% 61% 64% 63% 62% 58% 53% 49% 32% 26% 21% 20% 18% 17% 16% 16% 1990 2000 2010 2020 2030 2040 2050 2060 over 80 years 64-79 years 20-64 years 0-19 years Figure 2: Evolution of age structure of population, 1990-2060, EU and Romania (source: Eurostat Statistics, demo_pjan) Aging trend is more pronounced in the rural areas. As 1st January 2010 the average age for total population was 39.6 years (38.1 years for men and 41 for women) while for rural areas the average age was 40.2 years. Unfortunately, most of this population is employed in subsistence agriculture, having fewer opportunities to get out of this situation and calling for increased resources to be supported. 1.2. Mitigating demographic trends by migration Migration can rebalance the demographic age structure in the high-income nations. In many EU Member States immigration is not only increasing the total population but is also bringing a much younger population. Having low or negative natural population growth rates, these countries consider the potential for migration a solving strategy for the dynamic problem of supporting an ageing population. More highly-skilled migrants are probably large net contributors to the tax revenue, as are migrants of working age, and those who stay only temporarily rather than becoming dependent upon state support in their old age. Thus, unless migration is managed explicitly for this purpose, it is unlikely to offer a major source of relief in the pending social

Andreea Claudia Serban / Procedia Economics and Finance 1 ( 2012 ) 356 364 359 security crises. On the other hand, economic crisis has prompted a series of reviews of policies on labour migration for the purposes of encouraging employment among the native population, Spain is one example. Even if these regulations are contrary to the principle of free movement of EU labour market, they affect short-term European labour market and of course Romania, directly targeted by measures in Spain. In Figure 3 it is presented the age distribution for Romanian citizens living in Spain and Italy in 2010. Foreigners living in the European Union are diverse and largely younger than the nationals of the EU Member States. As we strengthened before, migration brings young population in destination country. In Italy and Spain, the first two countries that receive Romanian citizens, is overwhelming the share of the population under 40 years (over 76% of total migrants). Age distribution of Romanian citizens living in Spain/Italy comparing to Spanish/Italian citizens living in their own countries, 2010 Italian Citizens living in Italy 29,2% 14,5% 15,6% 40,7% Romanian Citizens living in Italy 44,1% 32,1% 17,0% 6,7% Spanish Citizens living in Spain 31,7% 16,0% 15,5% 36,8% Romanian Citizens living in Spain 48,3% 28,1% 14,8% 8,8% 0% 50% 100% Less than 30 years From 30 to 39 years From 40 to 49 years 50 years and older Figure 3: Comparative situation of the age distribution for Spanish/Italian citizens versus Romanian migrants living in Spain/Italy (Source: Eurostat Statistics migr_pop1ctz) Intrinsic labour demands in modern industrial societies create a constant need for new workers at the bottom of the social hierarchy, who will accept low wages and a lack of social mobility perspectives, motivated by a desire to increase status in their community of origin rather than at destination. The demographic ageing process taking place in modern industrial states may further enhance the demand for lowskills immigrant labour. The main reason of migration for Romanian citizens is the existence of economic disparities between Romania and the developed countries, which leads individuals to seek better paid jobs in the hope of obtaining higher earnings. The dominant restraint on international migration is surely a reluctance to relocate, despite widening income gaps between the poorest and wealthiest nations. Most people would simply rather stay home, though many are impelled to migrate by the failure of employment to keep pace with the labour force or the lack of security in their home countries. And as Figure 3 shows the major part of Romanian citizens living in Spain and Italy (choose migration) represents young people, deepening the importance of aging problems in departure countries. 1.3. Influences on labour market Becoming a process of increasing importance, the aging population needs to be addressed by some convergent solution of birth stimulation and of increasing human capital. Human capital represents the base for future society development. Evolution of population in terms of age structure, area of residence, level of education is important factor of labour market. The limited demographic growth and aging population require special attention to higher capitalization of human capital, both through training of employees, and especially by increasing labour productivity. The demographic trends in recent years and the pessimistic forecasts for the next period will affect overall economy. Two categories of effects were found (Caron et al., 2005): Direct effects: the size and quality of employment, capital/labour ratio and technical progress;

360 Andreea Claudia Serban / Procedia Economics and Finance 1 ( 2012 ) 356 364 Indirect effects: effects on budgets and, thus, on the whole economy. The impact of aging on the labour market is reflected in the negative impact on labour volume, diminishing economic resources needed to support older people, pressure on education systems, social and health insurance. In the short term, positive effects can be expected by reducing costs for pre and post natal leaves, child benefits, healthcare, education, in the long term, however, increase the elderly dependency ratio. Expected decline of the working age population is a phenomenon that will affect European Union labour market in the next four decades, according to European Commission forecast. If we consider the increase in life expectancy forecasted by European Commission for period 2020-2060, the difference between average exit age and life expectancy will increase significantly till 2060. In 2009 the average exit age from the labour market was 61.4 years in European Union (Figure 4) and life expectancy was 79 years. Till 2060 life expectancy will increase by 7.8 years for women and 6.4 years for men in European Union. This means that will be a supplementary pressure on social security systems. As we stressed before, labour market in Romania is now characterised by natural reducing of labour force supply due to decrease and aging population, situation that determine measures for increasing working life, 65 years for men and 60 years for women. The same type of measures were already adopted in other EU countries (official retirement age is 65 years in Belgium, Portugal, Finland, Ireland, Denmark, Netherlands, retirement age is 67 years in Sweden and Germany has increased retirement age from 65 to 67). Average exit age from labour market, 2009 65,0 64,0 63,0 62,0 61,0 60,0 59,0 58,0 57,0 56,0 European Union Sweden Romania Ireland * Bulgaria Netherlands United Kingdom Cyprus Latvia * Portugal * Estonia Spain Denmark Germany Finland Belgium * Greece Austria * Czech Republic Malta Italy France Lithuania * Slovenia * Luxembourg * Poland * Hungary Slovakia Figure 4: Average Exit age (* level refers to the recent available date (2005-2008), Source: Eurostat Statistics) Also as a consequence of increasing life expectancy as a result of medicine progress and as a consequence of reducing fertility rate (due to birth control, increasing level of education and labour force participation rate especially for women) old age dependency ratio will increase in all European Union s countries (Figure 5). Life expectancy for women in Romania will increase by 7.5 years reaching 85 years in 2050 and for men will increase by 10 years reaching 79.9 years. This represents a supplementary pressure on social security systems. Old Age Dependency Ratio 80 60 40 20 0 64,77 50,16 45,52 52,55 38,33 31,37 53,81 20,60 21,90 23,20 24,70 25,90 40,65 30,23 25,68 15,6 17,6 19,3 21,1 21,4 1990 1995 2000 2005 2010 2020 2030 2040 2050 2060 EU Rom Figure 5: Old age dependency ratio, 1990-2060, EU and Romania (Sursa: Eurostat Statistics)

Andreea Claudia Serban / Procedia Economics and Finance 1 ( 2012 ) 356 364 361 Under these conditions there are solutions for reducing the burden of elderly referring to increasing the retirement age as we mention above, or at least give those interested the chance to work after retirement. Increasing retirement age and employment rate to 75% (the Lisbon and Europe 2020 strategies aims) represents common European policies to which Romania have to adapt. Another effect of aging population having impact on economic development is the change of demand and consumption structure. Some economic sectors may have spectacular development (services for older people such as medical services, and food services) over others (education, transport, recreation and consumer goods, housing services respectively) (Hagemann, Nicoletti, 1989). This may require significant shifts between sectors and increase occupational mobility (inside and outside national borders), which in turn can lead, at least in the short term, to productivity decreases if most of the newcomers have a relatively low qualification in the new field. In this respect, studies in developing and developed countries shows that population aging could lead to development of low-productivity sectors (Thiessen, 2007). The relationship between productivity and age of employees is a complex problem. The relation can not be easily addressed because of seniority allowances that add to the salary. Some author show that, despite the fact that income continues to grow in the second part of active life on the labour market, productivity can be reduced (Skirbekk, 2003). This creates a discrepancy between wages and productivity, so that young workers are paid less and older more than their individual productivity. In this approach, companies will lose if they employ older workers comparing to the situation they employ young workers. Therefore, the income levels of older workers exceed their productivity, their employment opportunities are reduced. The cause for productivity decreases due to age can be reduced cognitive abilities over a person's life (Caron et al., 2005). Some skills like sense of observation decreased significantly from young age, while others, such as communication skills known only minor changes throughout life. Even with broader experience, older people can learn in a lesser degree and have a low memory and reasoning capacity. Periods of unemployment at an older age can cause great problems for population that are about to exit labour market. While unemployment is a matter of great importance, long-term unemployment becomes increasingly important for older people as it is already for youth. The quick technological advance and even changing population age-structure may require shifting jobs (employment structure) and qualification that are much difficult at an older age. Long-term unemployment, as percent of total unemployment, for people over 50 years is very high both in Romania and in European Union. In Romania 43.7% of unemployed persons over 50 years were in this situation for more than 12 month, comparing to total long-term unemployed that represents 34.9%. 2010 is the first year when long-term unemployment as percent of total unemployment was lower in Romania comparing to EU average (Figure 6). Long-term unemployment by age groups 80,0 40,0 29,528,5 45,3 40,7 59,2 52,1 44,0 39,9 36,334,0 52,7 33,4 68,8 43,7 48,6 34,9 0,0 From 15 to 24 years From 25 to 49 years From 50 to 64 years Total (15-64 years) From 15 to 24 years From 25 to 49 years From 50 to 64 years Total (15-64 years) EU Romania 2001 2010 Figure 6: Long-term unemployment as percent of total unemployment by age groups (Source: Eurostat Statistics, lfsa_upgal)

362 Andreea Claudia Serban / Procedia Economics and Finance 1 ( 2012 ) 356 364 Concluding, demographic trends will lead to changes in the labour market through both direct effects affecting the size and quality of working age population, changing occupational structure but also by increased pressure on social security systems and effects on labour productivity. 1.4. Education for future Education is important for both the present and the future, giving individuals the knowledge, abilities, skills to participate effectively in society life, to expand the actual knowledge, to successfully activate, integrate and reintegrate on the labour market. The educational attainment can be use as a measure of human capital. The structure of education can be useful information to estimate the skills available in a population and labour force. Considering the current demographic prospects regarding aging, migration, limited growth, education is the main process that can improve the future evolution on labour market in order to create the necessary resources for the next generation (fewer but older). As a result of globalization and of increasing the international competition decreases the demand for workers with low skills, new jobs involving high performance, flexibility, the focus on qualities such as: high level of training, creativity, openness to change, initiative. Labour flexibility that becomes more and more important in the globalization world can be developed through education. People need more knowledge, skills and work in multidisciplinary teams. Not all people can become conceptual analysts (Reich, 1996) and, as noted, neither it is required but only an adaptation of all people to the new system, the new economy. Education plays a central role in preparing individuals to enter the labour force, as well as equipping them with the skills to engage in lifelong learning experiences. Rapid expansion of education has not necessarily been accompanied by rapid economic growth in many developing countries. Across EU countries, the share of younger adults (25-34 years-old) who have attained at least upper secondary education is 66%. Younger adults have higher levels of tertiary education than the generation about to leave the labour market (55-64 years-old). On average across EU countries, 23% of all adults have completed tertiary education, but among younger adults this level rises to 33% while among the older age group it falls to 19%. In Romania, 12% of all adults have completed tertiary education, with a higher difference between younger adults (21%) and older adults (8%) (Figure 7). Educational attainment of the population by age group, 2010 100% 80% 60% 40% 20% 0% 13% 11% 8% 21% 28% 23% 19% 33% 50% 42% 66% 55% 69% 48% 48% 47% 41% 38% 29% 24% 19% 24% 17% 23% 25-34 years 35-44 years 45-54 years 55-64 years 25-34 years 35-44 years 45-54 years 55-64 years Romania UE Tertiary education - levels 5-6 (ISCED 1997) Upper secondary and post-secondary non-tertiary education - levels 3-4 (ISCED 1997) Pre-primary, primary and lower secondary education - levels 0-2 (ISCED 1997) Figure 7: Education attainment by age groups, 2010 (Source: Eurostat Statistics) The current economy requires well trained, adapted workforce. Education, especially but not only formal education as the basic ingredient in creating human capital is a precondition for the future economic development, being but at the same time, the result of the past economic development, since raising the living

Andreea Claudia Serban / Procedia Economics and Finance 1 ( 2012 ) 356 364 363 standards along with the continuous economic growth and the more complex social and economic environment lead to an increase in demand for adequate human capital. The role of education in providing access to employment is reflected in increasing employment opportunities for the educated people. People with higher levels of education have better job opportunities, reflected in a higher employment rates on labour market: the employment rate for tertiary educated people was 82% in Romania and in European Union, greater than total employment rate both in European Union (64%) and in Romania (59%). Persons with tertiary education are more likely to be in work than nongraduates (Figure 8). Implication of education on labour market, 2010 90 60 71 53,8 75,2 87 63,6 46,3 67,9 87,1 64,2 45,1 68,4 82,3 58,8 43 62,2 82,4 Total Primary 30 9,7 16,2 9,1 5,4 7,6 7,2 8,3 5,4 Secondary Tertiary 0 EU Rom EU Rom EU Rom Activity Employment Unemployment Figure 8: Implications of education on labour market (Source: Eurostat Statistics, lfsa_argaed, lfsa_ergaed, lfsa_urgaed) Activity rate is higher for educated people both in European Union and in Romania, with a greater difference from the total rate in Romania s case. The same positive effect of higher level of education can be seen in case of unemployment, where the lowest rate both in European Union and in Romania has tertiary educated people. The atypical situation in unemployment case is the rate for primary educated people (7.2%) that is lower than unemployment rate for secondary education (8,3%) (Figure 7). This is partly the effect of the large part of population employed in agriculture mainly in subsistence agriculture. Education is essential for any economy, on the one hand because, through education, they diversify the relations between man and society, the individual having the ability to contribute as a member of the society with something to counterbalance what he receives as a result of the coexistence with the others. Moreover, the current economy needs well-trained workforce, in terms of globalization and technological revolution, which requires the development of skills, creativity, solid knowledge and a greater sense of responsibility (Aceleanu, 2011). Young people have higher education levels than the generations to withdraw from the labour market. This is an important reason why young people are more involved in lifelong learning (the percentage of participation in lifelong learning is higher for people more educated) in addition to significantly higher return investment period. Young people have a greater adaptability to change and therefore increased labour market flexibility. 2. Conclusion Demography represents an important aspect of socio-economic life, considering the aging and decreasing population prospects that affect with different intensities all European Union countries. An older population poses supplementary pressure on security social systems, over the pressure due to unemployment, long term unemployment, disadvantaged groups etc. The dependency ratio increased over the

364 Andreea Claudia Serban / Procedia Economics and Finance 1 ( 2012 ) 356 364 last period and will continue this trend in the next decades. The aging population will also affect the occupation structure by economic sectors due to changes in consumption and demand. On labour market the most rigid labour force are older people. Young people can easily adapt to changing economic conditions being willing to retrain and change occupation and job. The need for flexibility is of increasing importance in conditions of globalization and integration in EU. Education becomes the key factor in solving the aging and decreasing population, but education for life not only the formal education in school years. A more educated labour force, as statistics shown, may imply a reduced unemployment and higher activity and occupation rates that meens more recourses for social security systems in the future. Acknowledgements This work was supported by the project Post-Doctoral Studies in Economics: training program for elite researchers SPODE co-funded from the European Social Fund through the Development of Human Resources Operational Programme 2007-2013, contract no. POSDRU/89/1.5/S/61755. References Aceleanu M (2011), The Relationship between Education and Quality of Life. Implications of the Labour Market in Romania, in Journal of International Scientific Publications, 2011, http://www.science-journals.eu/edu/index.html Becker, G (1997), The Human Capital, All Publishing House, Bucharest, 1997 Carone, G; Costello, D; Guardia, N; Mourre G.; Przywara, B.; Salomaki, A (2005), The economic impact of ageing populations in the EU25 Member States, European Commission 2005, Brussels Hagemann R.P., Nicoletti, G. (1989), Population Ageing: Economic Effects and Some Policy Implications for Financing Public Pensions, OECD Economic Studies, No. 12, 1989 Reich, R (1996), The Work of Nations, Paidea Publishing House, Bucharest, 1996 Sen, Amartya (2000) Work and Rights, International Labour Review, Vol.139 (2000), No.2, ILO, 2000, http://www.ilo.org/public/english/revue/download/pdf/sen2000-2.pdf Stiglitz, Joseph E.; Walsh, Carl E. (2005), Economics, Editura Economică, Bucureşti, 2005 Thießen, Ulrich (2007), Aging and structural change, Discussion papers //German Institute for Economic Research, No. 742, http://hdl.handle.net/10419/27266 Serban, A.C. (2012), Implications of Educational Attainment on Labour Market, Theoretical and Applied Economics no.3/2012, http://www.ectap.ro/articol.php?id=703&rid=84 Serban, A.C.; Aceleanu, M.; Iacob, D (2011) Fewer Borders for Romanian Citizens. Gains and Losses from Migration - Romania Case, Proceedings of The 16th IBIMA Conference on Innoviation and Knowledge Management: A Global Competitive Advantage Skirbekk V. (2003), Age and Individual Productivity: A Literature Survey, MPIDR Working Paper WP 2003-028, August Cedefop/ Skills supply and demand in Europe, Cedefop Louxembourg 2010 European Commission/ New skills for new job. Anticipating and matching labour market and skills needs, European Commission 2008 European Commission, Demography Report 2010, Luxembourg 2011, http://ec.europa.eu/social/main.jsp?catid=738&langid=en&pubid=5936&type=2&furtherpubs=no European Institute of Romania/ Strategic directions for sustainable development in Romania, European Institute of Romania, 2006 New Skills for New Jobs: Action Now (2010), European Commission, Online http://ec.europa.eu/social/main.jsp?catid=568&langid=en [Retrieved April, 14, 2011] World Bank/ Europe&Central Asia, Knowledge Brief, May 2010, vol.20, http://www.worldbank.org/eca [Retrieved September, 01,2011]