Selected Issues

Abstract

Selected Issues

Demographic Headwinds1

Adverse demographics will weigh on the long-term growth prospects. To address the challenge of declining working age population, policies should not only aim to support fertility, but also to increase labor force participation rate, to improve labor allocation across sectors and to encourage net immigration. However, with some recent measures going in the opposite direction, even such mitigating policies may not fully offset the demographic headwinds.

A. Stylized Facts and Trends

1. Poland faces profound demographic changes. The decline of fertility rate and growing life expectancy, mostly driven by longevity of older cohorts, will significantly change the demographic landscape. As of now, Poland is still a relatively young population by the European Union (EU) standards, with the share of seniors (aged 65+ years) at 15 percent of total population, 3 percentage points below EU average. However, adverse demographics is at work, with the old-age ratio projected to more than double by 2050, surpassing EU levels. Projections2 envisage that, despite some uptick in fertility rate, the age pyramid will become skewed toward old-age cohorts, while the share of working age groups will diminish dramatically (Figure 1).

Figure 1.
Figure 1.

Poland: Population Aging

Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A001

Sources: Eurostat and IMF staff calculations.Note: CEE EU: Bulgaria, Croatia, Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia; EU15: Austria, Belgium, Denmark, France, Finaland, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, and -United Kingdom.

2. Decline in working age population has already begun. Following years of growth, the working age population has been trending down since 2012. Demographic projections suggest that this process will go on for decades, yielding some ¼ decline in the number of working age persons by 2050,3 one of the largest declines in the EU. While other EU countries are also facing demographic problems, the downward trend in Polish working age population will be much steeper (Figure 2). Under the constant productivity assumption, such a decline in the share of working age population would lower GDP per capita by almost one-fifth.4

Figure 2.
Figure 2.

Working-age Population in Poland

Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A001

Sources: Eurostat and IMF staff calculations.

3. Demographics may soon pose a barrier for growth. The historical expansion of working age population appears to have been only partly utilized to boost potential growth, with increased unemployment and declined labor force participation rates dampening potential gains. This has changed in recent years, as declining unemployment and rising participation supported employment growth despite diminishing working age population (Figure 3). However, unemployment rate may be below the natural rate already, and further gains in activity could be undermined by the reduction in the retirement age.5 In such an environment, declining working age population could soon become a barrier to sustained employment gains and a constraint on growth.

Figure 3.
Figure 3.

Economic Growth and Labor Market

Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A001

Sources: Eurostat, GUS, NBP, and IMF staff calculations.1/ Not adjusted for temporary migrants.2/ Harmonized unemployment rate based on Labor Force Survey.

4. Net migration was also a drag on the labor supply in the past, but this has changed recently. In addition to a steady outflow of permanent migrants, there was a sharp pickup in temporary migration after EU accession (Figure 4).6 Persons in mobile working age (18–44 years) accounted for a large share of temporary migrants, around 60 percent relative to 40 percent in total population (GUS, 2014). An offsetting factor was the increasing inflow of migrant workers, mainly from Ukraine (Figure 4).7 This growing immigration wave reflected pull factors—labor shortages in the Polish labor market—and push factors—political tensions and economic crisis in Ukraine. While inflows of migrant workers exceeded outward migration recently, sustainability of continued large inflows may be in doubt if the situation in Ukraine improves or if the EU visa restrictions are relaxed further for Ukrainian citizens. Moreover, the magnitude of demographic headwinds is such that migrants are unlikely to solve the labor market shortages going forward, as discussed below.

Figure 4.
Figure 4.

Migrations to and from Poland

Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A001

Sources: GUS, Ministry of Family, Labor and Social Policy, and IMF staff calculations.1/ Declarations allow to hire foreigners for a period not exceeding 6 months within 12 consecutive months, hence approximate impact on employment is ½ of the change in declarations.

5. Current growth pattern is not sustainable given population trends. While past GDP growth mostly reflected productivity gains, the growth model has evolved in recent years towards a growing role of employment (Figure 5). Since adverse demographics is likely to make further employment gains difficult, sustainability of current growth pattern is in doubt. Labor productivity trended down for years, and reversing this may not be easy, with low hanging fruit largely exploited and with further productivity dynamics generally harder to achieve at higher per capita income levels. Even if a downtrend in productivity growth is stopped, but employment just follows the working age population dynamics, the GDP growth would slow to below 1½ percent in the next decades (Figure 5), which underscores the importance of policies to address both demographic challenges and the productivity growth slowdown.

Figure 5.
Figure 5.

Productivity Growth

Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A001

Sources: Eurostat, Total Economy Database, and IMF staff calculations.

B. Policies

6. Policies need to support labor supply and productivity. Adverse demographics is considered a big challenge to sustainable growth in the government’s Responsible Development Strategy (RDS) (CoM, 2017). Policies could address this challenge by affecting labor supply or productivity. The first category would comprise measures to increase fertility, participation rates, or encourage inward migration. The second set of policies could aim at improving human capital, allocation of labor among sectors of the economy, or increasing capital-to-labor ratio. Fixed investments and total factor productivity (TFP) are analyzed separately in subsequent chapters, while here we highlight some policy options related to the labor market. Given complexity of the issue, this list is by no means comprehensive, rather it highlights some of the main options in selected policy areas:

  • Fertility: Poland’s total fertility rate is among the lowest in the EU and, while forecasts assume some increase, even the most optimistic scenarios do not envisage a recovery that would allow a full generational replacement. At the same time, opinion polls suggest that the optimal number of children for Polish women is above two. Family policy should support fertility but, even if successful, the newborns will enter the labor market with a long lag. Meanwhile, policies should not exacerbate demographic pressures by eroding the already low female labor force participation. International experience shows that improving access to pre-school childcare, promoting flexible work arrangements, or lowering tax rates on second earners could be useful in this regard (Christiansen and others, 2016a, Christiansen, Sierhej, 2016b). With the new Family 500+ program, Poland’s family cash benefits would be among most generous in OECD. However, international experience suggests that family policy package should be carefully crafted, as higher outlays may not necessarily translate into better fertility outcomes (Figure 6).

  • Labor force participation: Participation rates in Poland are low compared to advanced EU countries, with the widest gap in older cohorts, particularly females. Closing the gap vs. EU15 immediately could increase labor force by 1.3 million persons on average in 2017–50, offsetting only one-fifth of the projected decline in the working age population. Evolving characteristics of the working age persons (e.g., better education)8 and incentives from employers in response to labor shortages are likely to improve participation rates, but should be augmented by policies targeted at vulnerable groups. Historical evidence points to the importance of statutory retirement age in determining activity among the elderly, as tighter early retirement provisions since 2009 lifted participation rate in old age groups, particularly among women, who had more privileges. Policies should support this trend given the still wide participation gap for older women (Figure 7), and their pensions adequacy being at risk unless they retire later.9 Although participation rate of prime-aged women is almost at par with developed EU peers, these cohorts are numerous, so a small improvement could yield sizeable gains. For example, narrowing the gap between prime-aged men and women by half could increase labor supply by ½ million persons by 2050 (Kielczewska, Lewandowski, 2017). Overall, there is a policy room to boost participation and mitigate negative demographic trends, with measures to lift effective retirement age (e.g., by curtailing special pension schemes), improve activity among youth and female (e.g., promoting flexible employment, as part-time work is rare at present), or pursuing family policy helping to combine childbearing and work.

  • Migration: The sharp increase in declarations to hire foreigners shows that employers see migrants, predominantly from Ukraine, as a response to labor shortages. These migrants tend to perform mostly low-skilled jobs in construction, household services, or agriculture (NBP, 2016). Going forward, there is a need for a policy to attract skilled migrants, which could usefully augment other measures aimed at addressing demographic challenges and skilled labor shortages. The Responsible Development Strategy (CoM, 2017) recognizes this need, and the Ministry of Family and Labor is working on changes in employers’ obligations related to migrant workers but details of planned regulations are yet unknown.

  • Labor reallocation: Given demographic headwinds, the ongoing downtrend in labor productivity dynamics is worrisome, as continued productivity gains are necessary to support strong GDP growth. Moving labor to more productive sectors could be one way to boost the overall productivity. Such a process has been taking place, accounting for one-fifth of productivity gains since 2000 (Figure 8).10 There is a room to continue such a structural transformation, as the least productive agriculture still represents a much larger share of employment than in developed EU countries, and the Responsible Development Strategy suggests that 20 percent of agricultural workforce may be idle (CoM, 2017). Econometric analysis shows that improving business climate, attracting greenfield FDIs, or reducing labor market duality could facilitate labor reallocation among sectors of the economy (Ebeke, Krogulski, Sierhej, 2015). It also suggests that regions enjoying stronger productivity growth were more successful in moving labor from farming to other higher-productivity sectors (Krogulski, Sierhej, Thegeya, 2016).

  • Quality of labor: While reallocation of labor would help, it needs to go in tandem with within-sector productivity improvements which offer potentially larger gains (Ebeke, Krogulski, Sierhej, 2015). In this context, upgrading the quality of human capital would help to improve sector-specific productivity. Policy measures in this area are desirable, as firms increasingly point to skilled labor shortages as a barrier to growth (see Chapter 2 for more details). The OECD analysis suggests that, despite notable educational achievements so far, deficits in vocational education remain large (OECD, 2016). Life-long learning, especially among persons with lower education attainments, is weak by international standards (Figure 9), likely reflecting widespread temporary work, as such workers are less likely to obtain training from their employers.

Figure 6.
Figure 6.

Fertility

Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A001

Sources: Eurostat, OECD, World Bank, and IMF staff calculations.
Figure 7.
Figure 7.

Labor Force Participation Rates

Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A001

Sources: Social Security Office (ZUS), OECD, Eurostat, and IMF staff calculations.
Figure 8.
Figure 8.

Labor Allocation

Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A001

Sources: Eurostat and IMF staff calculations.
Figure 9.
Figure 9.

Quality of Labor

Citation: IMF Staff Country Reports 2017, 221; 10.5089/9781484310311.002.A001

Sources: Central Statistical Office (GUS), OECD, and IMF staff calculations.

7. Recent policies may add to demographic pressures. Instead of addressing risks to sustainable growth posed by adverse demographics, some recent measures are likely to have the opposite effect:

  • Retirement age: Changes enacted in 2012 imposed gradual increase in statutory retirement age from 60 years for women and 65 years for men to an equalized 67 years, with this target to be reached in 2020 for men and in 2040 for women. The authorities decided to reverse this process, restoring previous retirement age (60/65) as of October 2017. Relative to the “no policy change scenario”, this decision will reduce the working age population by close to 2½ million persons by 2050 (GUS, 2014). It will also imply a sizeable fiscal cost at about ½ percent of GDP per year.

  • Child benefits: The new child benefits scheme (Family 500+) guarantees a lump sum benefit for each second and next child in a family (poorer families are also eligible to receive this benefit for the first child), implying annual fiscal cost of above 1 percent of GDP. The program is hoped to encourage fertility, yielding 290,000 additional births in ten years after its introduction. 11 However, such scheme could also have a negative impact on the female labor force participation rates, with estimates pointing to a possible withdrawal of 240,000 persons from the labor market (Myck, 2016). While it is too early to judge the actual results, cross-country experience suggests that lump-sum cash benefits tend to discourage female employment (Christiansen and others, 2016a).

  • Other recent measures affecting the labor market:

    • The authorities decided to increase the primary schooling age by one year to 7 years, keeping the overall duration of primary and secondary education intact Other things equal, this would imply a later start of work, reducing labor supply by about 300,000—400,000 persons over long-term.

    • Minimum wage hikes significantly outpaced average wage growth in recent years, increasing the minimum to average wage ratio from 35 percent in 2004 to an estimated 47 percent in 2017, relatively high compared to EU peers. As of 2017, a minimum hourly pay, corresponding to the minimum wage, was imposed on some civil law contracts (CLCs), which were widely used in the service sector, like cleaning or security. High level of minimum wage could potentially be harmful, especially for youth employment. Analysis for the region suggests non-linear adverse effects on employment, becoming starker when the minimum-to-average wage ratio reaches 45 percent (Raei and others, IMF, 2016).

    • Given deflationary environment in recent years, the authorities departed from the CPI based indexation of minimum pension, mandating a 13 percent hike as of March 2017. Such a decision, apart from increasing aging related cost, is likely to reduce incentives to stay at work after reaching retirement age.

8. The impact of recent policies on labor supply may be difficult to offset. Estimates presented in Table 1 suggest that recent policies (notably the reversal of the 2013 retirement age increase) have significantly exacerbated the already unfavorable trends in the working age population. This conclusion holds even after allowing for positive impact of the new child benefits on fertility and such mitigating factors, as higher participation rates or increasing immigration. Additionally, recent policy measures entail large fiscal costs, with child benefits and lower retirement age alone likely to have a negative fiscal impact of above 10 percent of GDP in the next decade, thus squeezing domestic savings and limiting resources for investments.

Table 1.

Labor Supply: Demographics and Policies

article image
Sources: Eurostat, Ministry of Family and Labor and IMF staff estimates.

Eurostat baseline demographic scenario

Compared to no-policy change (retirement age equalized at 67)

Additional births as in official projections. Constant after 2026.

Primary school age increased from 6 to 7 in 2016

As in the RDS, LFP goes up from 68 to 73 percent by 2030 and remains constant afterwards.

Migrant workers double from estimated 0.8 million in 2016.

Gradual convergence to LFP in Sweden 2015 (82 percent)

C. Concluding Remarks

9. Over the past decades, Poland enjoyed a steady increase of the working-age population. The recent reversal of this trend poses a challenge for growth going forward, as labor supply will become constrained. There are mitigating factors which, if managed properly, may smooth the transition to a new reality. Labor force participation is low by international standards, suggesting some scope for more efficient use of the working-age population. Moreover, recent migration trends suggest that Poland may become a recipient country. Meanwhile, recent policies seem to have exacerbated the adverse impact of demographic trends. In this context, measures to increase labor force participation and labor productivity will be key. Measures facilitating labor reallocation towards more productive sectors and a steady improvement of labor quality are likely to yield significant gains as well.

References

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  • Kielczewska Aneta, Lewandowski Piotr, 2017, “Population Aging and the Labor Supply in Poland up to 2050”, in “Population Aging, Labor Market and Public Finances in Poland” (Warsaw: EC Representation in Poland)

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1

Prepared by Krzysztof Krogulski and Robert Sierhej.

2

Unless noted otherwise, demographic outlook is based on the Eurostat population projections (Europop 2015).

3

Unless noted otherwise, working age population is defined as persons aged 15–64 years, not including temporary migrants.

4

GDP per capita could be written as GDP/POP=(GDP/WAP)*(WAP/POP) where POP and WAP are total and working age population, respectively. Assuming constant productivity, the projected decline in WAP/POP from 70 to 57 percent would imply a 19 percent lower GDP per capita.

5

NBP latest projections (NBP, 2017) suggest that NAWRU was 6.3 percent and unemployment rate 6.1 percent in 2016, with unemployment rate envisaged to stay below NAWRU in 2017–19 and participation rate projected to deteriorate slightly.

6

Central Statistical Office (GUS) defines temporary migrants as those staying abroad for more than 2 months until 2006 and more than 3 months since 2007, but not declaring a permanent change in residence.

7

There are no precise data on migrant workers. Ministry of Family and Labor provides data on work permits for foreigners and employers’ declarations to hire workers from selected CIS countries (Armenia, Belarus, Georgia, Moldova, Russia, and Ukraine). In 2016, employers issued 1.3 million declarations, more than a fourfold increase from 2013. Declarations could only proxy the number of migrant workers, as they do not oblige hiring and allow ½ year work within 12 months. NBP estimated that 1.22 declaration was issued per Ukrainian worker, and the average stay in Poland was 5 months in 2015 (NBP, 2016).

8

Estimates suggest that changing characteristics of the working age population could boost labor supply by some ½ million of persons by 2050 (Kielczewska, Lewandowski, 2017).

9

According to the Social Security Administration (ZUS), reducing the retirement age will yield lower pension benefits, with the difference small in earlier years but ultimately men projected to receive 20 percent and female 32 percent lower pensions by 2050 (CoM, 2016a).

10

This topic is discussed in Poland Selected Issues (Ebeke, Krogulski, Sierhej, IMF, 2015), with findings based on more granular data suggesting that labor reallocation could explain about ½ of cumulative productivity gains.

11

The projection is based on Ministry of Family and Labor impact assessment to the law of family benefits (CoM, 2016). International evidence suggests that effectiveness of such programs on fertility may be limited, depending on country-specific circumstances (see Christiansen, Sierhej, 2016; Sobocinski, 2014).

Republic of Poland: Selected Issues
Author: International Monetary Fund. European Dept.