The Impact of Aging on Growth
Author:
International Monetary Fund. European Dept.
Search for other papers by International Monetary Fund. European Dept. in
Current site
Google Scholar
Close

Slovakia’s working-age population is expected to decline over the long run while the share of the old is expected to increase. With low fertility and net outward migration and increasing life expectancy, the country is already facing the headwinds of a declining working-age population. These trends are expected to worsen going forward, putting pressure on employment, growth, and fiscal sustainability Projections of real GDP per capita over the next 50 years that account for the impact of aging point to a stagnation of living standards. Labor market policies as well as industrial and innovation policies will be needed to reverse the decline in working-age population and boost productivity and growth.

Abstract

Slovakia’s working-age population is expected to decline over the long run while the share of the old is expected to increase. With low fertility and net outward migration and increasing life expectancy, the country is already facing the headwinds of a declining working-age population. These trends are expected to worsen going forward, putting pressure on employment, growth, and fiscal sustainability Projections of real GDP per capita over the next 50 years that account for the impact of aging point to a stagnation of living standards. Labor market policies as well as industrial and innovation policies will be needed to reverse the decline in working-age population and boost productivity and growth.

The Impact of Aging on Growth1

Slovakia’s working-age population is expected to decline over the long run while the share of the old is expected to increase. With low fertility and net outward migration and increasing life expectancy, the country is already facing the headwinds of a declining working-age population. These trends are expected to worsen going forward, putting pressure on employment, growth, and fiscal sustainability Projections of real GDP per capita over the next 50 years that account for the impact of aging point to a stagnation of living standards. Labor market policies as well as industrial and innovation policies will be needed to reverse the decline in working-age population and boost productivity and growth.

Demographics Today and in the Future

1. Slovakia’s population is expected to decline as fertility and immigration stay low. Slovakia’s population growth has turned negative and like in many other EU countries is projected to remain negative for the foreseeable future. Low fertility and immigration rates are not contributing favorably to population dynamics. With fertility below the replacement level and low immigration rates (and relatively high outward migration of the young), the outlook for population growth going forward is relatively grim.

uA002fig01

Population Growth Rate in EU Countries

(Percent)

Citation: IMF Staff Country Reports 2024, 076; 10.5089/9798400271021.002.A002

Sources: Haver Analytics, UN and IMF staff calculations.
uA002fig02

Total Fertility Rats in EU countries

(Live births per woman)

Citation: IMF Staff Country Reports 2024, 076; 10.5089/9798400271021.002.A002

Sources: Haver Analytics.. UN and IMF staff calculations.

2. Increasing life expectancy is projected to increase the share of the old in the population and the old-age dependency ratio. Life expectancy is expected to increase above 80 years of age but remain below the EU median. The share of the old is expected to increase substantially by 2050 while low fertility is projected to reduce the share of the young. The old-age dependency ratio is projected to double by 2050, and the total dependency ratio (including the young and the old as the share of the working-age population) is projected to increase as well.

uA002fig03

Life Expectancy at Birth in EU Countries

(Years)

Citation: IMF Staff Country Reports 2024, 076; 10.5089/9798400271021.002.A002

Sources: Haver Analytics, UN and IMF staff calculations.
uA002fig04

Total Population

(Selected age group, percent)

Citation: IMF Staff Country Reports 2024, 076; 10.5089/9798400271021.002.A002

Sources: UN and IMF staff calculations.

3. These unfavorable population dynamics imply that the working-age population is expected to decline substantially, affecting the size of the labor force. Since the early 2010s, the working-age population ratio (15–64 years of age) has been falling from highs above 70 percent to 67 percent in 2022, and it is expected to fall to 57 percent by 2050 and converge to the (declining, albeit at a slower pace) level in the EU. The declining working-age population and increasing dependency ratios will put downward pressure on the labor force going forward.

uA002fig05

Population Projection

(Percent)

Citation: IMF Staff Country Reports 2024, 076; 10.5089/9798400271021.002.A002

Note: Working age population is defined as those aged 15 to 64. Dependency ratio is the ratio of people aged 0 to 14 plus 65 and above to the working age population.Source: Eurostat and IMF staff calculations.

4. The female labor force participation rate (LFPR) in Slovakia has been rising since 2010 and is close to the EU average. Since 2010, the female LFPR (in the 15–64 age group) has increased from about 60 percent to 72 percent by 2022. It is higher than the OECD average of about 66 percent and similar to that of Slovenia and Czechia, but lags that of the Baltic states and is far behind Sweden, which at 81 percent has one of the highest female LFPRs in the OECD. Moreover, it is lower than men’s LFPR of about 80 percent.

uA002fig06

Female Labor Force Participation Rate

(Selected EU countries, age 15 to 64)

Citation: IMF Staff Country Reports 2024, 076; 10.5089/9798400271021.002.A002

Sources: OECD and IMF staff calculations.
uA002fig07

Old-age Labor Force Participation

(Selected EU countries, age 65+)

Citation: IMF Staff Country Reports 2024, 076; 10.5089/9798400271021.002.A002

Sources: OECD and IMF staff calculations.

5. The old-age labor force participation rate in Slovakia has increased but remains one of the lowest in Europe. In 2022, the old-age LFPR (over 65 age group) was about 5 percent, up from 2 percent since 2010 but below the OECD average of about 16 percent and behind Czechia and the Baltics and much lower than Sweden, which has one of the highest LFPRs in the OECD.

Economic Growth: A Look into the Past

6. Slovakia’s real GDP per capita amounted to about 44 percent of the U.S. level in 2019.2 Relative income declined to about 33 percent by 1999 from about 50 percent in 1990 before increasing back to 50 percent in the early 2010s.3 It has since declined to 44 percent at the start of the COVID-19 pandemic.

7. Slovakia’s recent growth performance has underperformed relative to the neighboring countries. Since the 2008 financial crisis, Slovakia’s real GDP per capita (in PPP terms) has stagnated and fallen below that of Latvia. In addition, income has not converged with that of neighboring countries like Slovenia and Czechia, even though in 1990 income levels of Slovenia and Slovakia were the same.4 The income gap with the richer neighbors has stayed relatively similar for the past 30 years.

uA002fig08

Real GDP per Capita

(in 2017 PPP USD)

Citation: IMF Staff Country Reports 2024, 076; 10.5089/9798400271021.002.A002

Source: Penn World Tables (PWT) 10.1

8. Productivity growth has been the driving force behind the rise in living standards since 1990, but both the investment rate and total factor productivity have declined since 2010. Total factor productivity (TFP) growth was relatively high in the decade following the fall of communism, exceeding that in Czechia and Slovenia, and driving most of the increase in real GDP per capita growth until the late 2010s. However, the investment rate fell from an average of 28 percent of GDP over 1994– 2010 to 23 percent of GDP in the last decade; TFP growth declined even more, falling from an average of 2.4 percent in the 1990s and 2000s to 0.7 percent since 2010.

uA002fig09

TFP at Constant National Prices

(Index; 1994=100)

Citation: IMF Staff Country Reports 2024, 076; 10.5089/9798400271021.002.A002

Source: PWT 10.1.

9. Decomposing real GDP per capita growth into its key components confirms that TFP growth has been the driving force of growth dynamics in Slovakia. Assuming a Cobb-Douglas production function, real GDP per capita (in constant national prices) can be written as follows:

yt=(KtYt)α1αhtlthrstAt11α,(1)

where K is physical capital, Y is real GDP, h is human capital per capita (based on years of schooling and returns to education), l is the employment to population ratio, hrs is hours worked, A is TFP (factor-neutral), and α is the capital share (and 1 – α is the labor compensation share).5 The growth rate of real GDP per capita then becomes (in logarithmic terms):

Δln(yt)=(α1α)Δln(KtYt)+Δln(ht)+Δln(lt)+Δln(hrst)+(11α)Δln(At)(2)

Hence, real per capita growth can be decomposed into (i) the capital-output ratio, (ii) human capital, (iii) the employment-population ratio, (iv) hours worked, and (v) TFP. Over 1994–2019, TFP growth contributed the largest share of growth in the region, including in Slovakia. Like in many European countries, hours worked in Slovakia have been on a declining trend and contributed negatively to growth. The capital-output ratio has declined with a fall in investment, putting downward pressure on growth.

uA002fig10

Cumulative Growth

(1994–2019)

Citation: IMF Staff Country Reports 2024, 076; 10.5089/9798400271021.002.A002

Sources: PWT 10.1 and Author’s calculations.

10. Over the last decade (2012–2019), Slovakia’s per capita growth has declined due to lower TFP growth. TFP growth continues to contribute positively to per capita GDP growth, albeit less than in previous years. At the same time, other components of growth such as human capital and the employment-population ratio have failed to compensate for the decline in TFP growth.

uA002fig11

Growth Rates

(Percent)

Citation: IMF Staff Country Reports 2024, 076; 10.5089/9798400271021.002.A002

Sources: PWT 10.1 and Author’s calculations.
uA002fig12

Average Annual Growth Rate

(2012–2019)

Citation: IMF Staff Country Reports 2024, 076; 10.5089/9798400271021.002.A002

Source: PWT 10.1 and Author’s calculations.

11. Adverse population dynamics would act as headwinds to both productivity and growth going forward. Aging and a declining working-age population would slow down growth directly and potentially reduce productivity growth. The impact on growth would be compounded as a result. The link between population dynamics and productivity growth can be seen by dividing productivity into a misallocation of resources and an ideas component. The ideas component of productivity is driven by the number of researchers and negative population dynamics could reduce the number of researchers (even if the share stays constant), putting pressure on TFP growth.6 Declining innovation and business dynamism may further hinder TFP growth. Slovakia’s recent growth performance has already shown signs of declining TFP. In addition, growth theory predicts that in the very long run, growth depends only on population growth while other variables only have level effects on income.7 Population dynamics is thus crucial for Slovakia to sustain its growth performance into the future.

Looking into the Future: Demographics, Productivity, and Growth

12. We use equation (2) to simulate different paths for trend real GDP per capita from 2024 till 2070 under the assumption of no change in policies to address the impact of aging. We use historical averages for 2012–19 to project forward all the major components except the employment-population ratio. In particular, human capital is assumed to grow by 0.7 percent per year, the capital-output ratio declines by 0.1 percent per year, hours worked fall by 0.7 percent per year, and TFP is assumed to grow by 1.4 percent per year. We forecast the employment-population ratio using projections in the UN Population Projections database which imply a decline of 0.4 percent a year.8 The labor share in GDP is assumed to remain constant at the 2019 value of 57 percent.

13. The figure shows several alternative paths for real GDP per capita (in logs). The line “Historical trends” assumes Slovakia continues to growth at its 2012–2019 average of around 2.5 percent per year. The green line (“EC”) assumes Slovakia grows by 1.7 per year as assumed by the European Commission in their 2024 Aging Report Projection. The upper part of the shaded area assumes a growth rate of 0.8 percent a year on average consistent with historical trends for the components of growth and UN population projections (as described in the previous paragraph). The same forecast using the European Commission’s more optimistic assumption on the employment-population ratio results in a growth rate of 0.9 percent (orange line).9 The lower part of the shaded area assumes zero growth for all major components while keeping the UN employment projections, resulting in growth of -0.4 percent per year. Lastly, a baseline projection of 0.2 percent growth per year assumes historical averages for all major components, UN population projections, and TFP growth equivalent to one-third of the recent historical trend, consistent with empirical evidence in Maestas, Mullen, and Powell (2023) that productivity falls by a third of the growth in the share of the old in the population.10 In the baseline, real GDP per capita could decline by about 9 percent by 2050.11

uA002fig13

Real GDP per Capita

(in logarithmic: form)

Citation: IMF Staff Country Reports 2024, 076; 10.5089/9798400271021.002.A002

Sources: UN Population Projections, European Commission's 2024 Aging Projections. PWT 10.1, and Author‘s calculations.

14. The simulations suggest that in the absence of strong policy measures, adverse population dynamics could create strong headwinds to growth and living standards. With a declining employment-population ratio, growth rate falls from 2.5 percent a year to 0.8 percent. Incorporating the impact of aging on TFP, growth rate falls further to 0.2 percent a year. In fact, for most part of the 21st century real GDP per capita stagnates and even falls, before recovering after the mid-2050s as the employment-population ratio starts growing again. All-in-all, living standards could be stagnant for the next 2–3 decades unless appropriate policy measures are taken to counter the adverse population dynamics.

Policies to Increase Living Standards

15. Reversing the projected decline in real GDP per capita in Slovakia will require supportive labor market policies to counter the impact of unfavorable labor force dynamics. We experiment with a few parameters to see the impact on the paths of real GDP per capita going forward. In particular, we assess the impact of increasing: (i) hours worked, (ii) total employment, (iii) female labor market participation, (iv) old-age labor market participation, (v) migration/working-age population, and (vi) a combination of labor market policies. We also explore the impact of reversing the projected decline in productivity.

16. Increasing hours worked raises the path of real GDP per capita going forward compared to the baseline, but it does not achieve the historical growth trend. Raising Slovakia’s hours worked (1,700 hours) to the OECD average (1,750 annual hours; green line) or to that in Poland (1,800 annual hours; blue line) increases the real per capita growth rate to an average of about 1 percent a year compared to the baseline of 0.2 percent.12 The simulation assumes the increase in hours to reach the OECD average is achieved over 10 years or 20 years for Poland, implying an increase of about 0.35 percent a year with hours worked fixed thereafter. This policy bucks the general trend of decreasing hours worked in Europe and may therefore be challenging. Even if it were feasible, it does not increase growth rate back to the historical average over the forecast period.

uA002fig14

Real GDP per Capita

(in logarithmic form)

Citation: IMF Staff Country Reports 2024, 076; 10.5089/9798400271021.002.A002

Sources: UN Population Proj, PWT 10.1, OECD, and Author’s calculations.

17. Policies to raise employment would have a significant effect on the growth rate of real GDP per capita. The simulation assumes that employment is raised such that the employment-population ratio increases from the current level of 0.45 to 0.5 (the level in Estonia and Sweden) over 10 years. The growth rate in employment needed to achieve this is about 1.1 percent per year for 10 years. The simulations suggest this would raise real GDP per capita growth to about 1.2 percent a year on average over 2024–2070 (orange line), significantly more than the policy to raise hours worked to the OECD average (green line) discussed in the previous paragraph.

uA002fig15

Real GDP per Capita

(in logarithmic form)

Citation: IMF Staff Country Reports 2024, 076; 10.5089/9798400271021.002.A002

Sources: UN Population Proj., PWT 10.1, OECD, and Author’s calculations.

18. The increase in employment could be driven by higher female or old-age labor force participation. A policy to raise the current 77.5 percent female labor force participation rate (20– 64 years of age) to 85 percent as in Sweden and Estonia, is consistent with an increase in employment of about 0.5 percent a year for 10 years. The growth rate of real GDP per capita resulting from such a policy would be about 0.95 percent a year over 2024– 2070 (1st figure, blue line). The results are similar if the policy to increase employment concentrates on raising old-age labor force participation. In particular, increasing the current old-age labor force participation rate of 4.8 percent (65+) to 19.2 percent (that of Sweden) over 10 years is consistent with an increase in employment of about 0.6 percent a year until 2033. The growth rate resulting from such a policy would be about 0.97 percent a year (2nd figure, blue line). Other options to increase employment include improving labor market conditions for the large Roma minority, which accounts for about 10 percent of Slovakia’s population and is younger than the population as a whole.

uA002fig16

Real GDP per Capita

(in logarithmic form)

Citation: IMF Staff Country Reports 2024, 076; 10.5089/9798400271021.002.A002

Sources: UN Population Proj, PWT 10.1, OECD, and Author’s calculations.
uA002fig17

Real GDP per Capita

(in oganthmic form)

Citation: IMF Staff Country Reports 2024, 076; 10.5089/9798400271021.002.A002

Sources: UN Population Proj. PWT 10.1, OECD, and Author’s calculations.

19. Increasing inward migration would help offsett the decline in the working-age population and employment going forward. In particular, a simulation assuming an increase in net inward migration by 18,000 per year on average would keep employment at the level in 2019/2022, implying an increase in employment growth of about 0.7 percent a year on average. The growth rate of real GDP per capita resulting from such a policy would be about 1 percent a year (blue line), similar to that of other policies above.

uA002fig18

Real GDP per Capita

(in logarithmic form)

Citation: IMF Staff Country Reports 2024, 076; 10.5089/9798400271021.002.A002

Sources: UN Population Proj., PWT 10.1, OECD, and Author’s calculations.

20. Policies to reverse the aging-related decline in productivity would help offset the impact of adverse population dynamics. The simulations above assume that aging will reduce TFP productivity by a third, consistent with estimates in Maestas, Mullen, and Powell (2023). A simulation which instead assumes that productivity growth increases by about 0.4 percent a year on average with labor market dynamics as in the baseline (no policies to offset the impact of aging on the labor market) raises the growth rate of real GDP per capita to about 0.8 percent a year on average (blue line).

uA002fig19

Real GDP per Capita

(in logarithmic form)

Citation: IMF Staff Country Reports 2024, 076; 10.5089/9798400271021.002.A002

Sources: UN Population Proj, PWT 10.1, OECD, and Author’s calculations.

21. A combination of labor market policies could raise the growth rate close to the recent historical trend. Raising both female and old-age labor force participation rates and increasing hours worked and net inward migration would increase the employment-population ratio, boosting growth. In addition, we assume that an increase in employment would also have a positive effect on productivity (partially reversing the decline due to aging). In this scenario average growth would increase to about 2.15 percent a year, close to the recent historical average of 2.5 percent. If we were to add a further increase in employment due to improved labor market conditions for the Roma minority, the historical growth trend could be within reach.

uA002fig20

Real GDP per Capita: Mitigating the Impact of Aging

(in logarithmic form)

Citation: IMF Staff Country Reports 2024, 076; 10.5089/9798400271021.002.A002

Sources: UN Population Proj,, PWT 10.1, OECD, and Author’s calculations.

22. A policy package to increase employment and productivity is key to mitigate the impact of aging on the growth dynamics and living standards. Policy options include:

Labor Markets

  • Provide incentives for flexible work hours (e.g., remote work).

  • Improve transportation links with key regional centers and increase urbanization.

  • Increase incentives for child support, early childhood education, and housing access to improve fertility rates (e.g., family package).

  • Improve personal and elderly care, reduce maternity leave (one of the longest in the OECD), and provide training after maternity leave.

  • Increase retirement age with life expectancy (as recently legislated), reduce early retirements, and provide training to the elderly (labor market exit at average age of 62, one of the lowest in Europe).

  • Support low-income population and minorities (e.g., Roma community) to participate in the labor market (e.g., housing, education/information).

Immigration

  • Align immigration with labor market needs whether high- or low-skilled (e.g., long-term visas for high-skilled), provide integration programs and skill training.

  • Strengthen relations with the Slovak diaspora to share knowledge and attract talent.

Productivity13

  • Create a dynamic export sector with a focus on (i) sophisticated products; (ii) sectors rather than firms to preserve competition and “creative destruction” and enforce accountability for the support received; and (iii) domestic firms producing homegrown technology.

  • Increase investment spending (e.g., infrastructure, industrial parks, training institutes, vocational programs), public R&D, and support to various innovation programs.

  • Raise the absorption of the EU funds in R&D, education, and infrastructure to support innovation and industrial clusters, universities, and research institutes.

Concluding Remarks

23. Without offsetting policy measures, aging could have a large negative effect on real GDP per capita growth and living standards in Slovakia. In an unchanged policies scenario average annual growth could fall from an historical 2.5 percent (2012–2019) to 0.2 percent on average over 2024–2070, with large implications on welfare and public finances as rising aging-related spending and declining tax revenues puts fiscal sustainability at risk. A comprehensive set of policies are required to keep employment growing, while policies to boost productivity growth are needed to compensate for the potential negative effect of aging on productivity.

References

  • Cherif, R. and F. Hasanov. 2019. “The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy.” IMF Working Paper 19/74.

    • Search Google Scholar
    • Export Citation
  • Feenstra, Robert C., Robert Inklaar and Marcel P. Timmer. 2015. “The Next Generation of the Penn World Table.” American Economic Review 105(10): 31503182. Available: www.ggdc.net/pwt.

    • Search Google Scholar
    • Export Citation
  • Hwang, H. and O. Roehn. 2022. “Tackling the Challenges of Population Ageing in the Slovak Republic,” OECD Economics Department Working Papers No. 1701.

    • Search Google Scholar
    • Export Citation
  • Inklaar, R. and M. Timmer. 2013. “Capital, Labor, and TFP in PWT 8.0.” University of Groningen Working Paper, July. Available: https://www.rug.nl/ggdc/docs/capital_labor_and_tfp_in_pwt80.pdf.

    • Search Google Scholar
    • Export Citation
  • Jones, Charles. 2022. “The Past and Future of Economic Growth: A Semi-Endogenous Perspective.” Annual Review of Economics 14: 125152.

    • Search Google Scholar
    • Export Citation
  • Maestas, Nicole, Kathleen J. Mullen, and David Powell. 2023. “The Effect of Aging on Economic Growth, the Labor Force, and Productivity.” American Economic Journal: Macroeconomics 15(2): 306332.

    • Search Google Scholar
    • Export Citation
1

Prepared by Fuad Hasanov.

2

Penn World Tables 10.01 (in 2017 PPP $).

3

The 20 percent level corresponds to the upper-middle-income threshold while the high-income threshold is defined as 50 percent of the U.S. level (Cherif and Hasanov 2019).

4

The methodological adjustment to PPP price calculations resulted in higher price growth in the recent period and reduced GDP in PPP terms in Slovakia relative to its neighbors. For more details, see https://www.mfsr.sk/files/archiv/14/ppp_web_EN.pdf.

5

See Inklaar and Timmer (2013). The data used are PWT 10.01. For a more extensive discussion of the growth decomposition, see Jones (2022).

8

The European Commission’s 2024 Aging Report Projection assumes the following parameters, which are not significantly different from the recent historical averages: (i) a 0.6 percent per year decline for hours worked; (ii) 1.3 percent per year TFP growth; and (iii) a 0.3 percent per year decrease in the employment-population ratio.

9

The European Commission incorporates the legislated future increase in retirement age that will raise the old-age participation rate and reduce the decline in the employment-population ratio.

10

Using U.S. states data over 1980–2010, Maestas, Mullen, and Powell (2023) estimate that about two-thirds of the fall in real GDP per capita due to aging is accounted by the decline in labor productivity while one-third is due to the decline in employment. We use the impact of aging on productivity from their regressions to adjust the projection of the growth of TFP in Slovakia.

11

The OECD estimates that Slovak GDP per capita could drop by 20 percent by 2050 (Hwang and Roehn 2022).

12

The latest data on hours worked, employment, labor force participation rates, etc. are taken from the OECD database.

  • Collapse
  • Expand
Slovak Republic: Selected Issues
Author:
International Monetary Fund. European Dept.