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Bank of Estonia: Labour force participation to rise despite aging society

Bank of Estonia economist Kaspar Oja.
Bank of Estonia economist Kaspar Oja. Source: Bank of Estonia

According to Bank of Estonia economist Kaspar Oja, the rate of labour participation among Estonian residents will increase over the next 30 years, even when taking into account the impact of the ageing society.

"According to population forecasts, Estonia's working-age population will see a significant decrease and ageing over the coming decades," Oja said in a Bank of Estonia press release. "The amount of people will decrease in age groups where the rate of workforce participation is high, and will increase in age groups with a low participation rate. But the picture is not as bleak when it comes to labour supply: increased participation in the labour market will be raised by the increase in retirement age and people's health improving. The latter is reflected in the fact that in recent years, participation in the labour market has increased in older age groups."

Not taking into account the work ability reform, the participation rate should decrease in the next few years, but start growing again approximately a decade from now, the economist said. "Thanks to the work ability reform, the participation rate will likely still increase slightly," he added.

According to Oja, the ageing of the population decreased the participation rate the most, as the share of age groups with the greatest economic activity is decreasing. "In addition, the expected increase in birth rate also decreases participation rate as it increases the share of women between the ages of 30 and 50 staying at home, but this impact is small compared to other factors," he noted, adding that along with the increase in childbirth age, the participation of women in their 20s in the labour market may even increase.

"The increase in retirement age to a great extent balances out the factors decreasing the participation rate," Oja observed. "The analysis has taken into account the retirement age hike through three variables: the retirement age itself, the right to early retirement, and the time of being of retirement age. This is why the retirement age hike of a concrete year increases participation in the labour market over a longer period of time and the increase in retirement age does not only affect those people whose age is in close vicinity of retirement age. Better health will also increase participation in the labour market in the future, the approximation of which used in the model was the mortality rate."

Regardless of the fact that the labour market participation rate is to increase slightly in the longer perspective, labour supply will nevertheless decrease as the number of working-age people will decrease by an average of 0.35% per year until 2050.

Participation activity in the analysis of the Bank of Estonia has been modelled across five-year age groups and genders, using population forecast indicators such as the change in life expectancy, the change in the birth rate as explanatory factors. When it comes to the retirement age hike that significantly impacts labour market participation, the assumption has been made that beginning in 2027, the retirement age will increase at the same tempo as the increase in life expectancy. The assessments do not take into account the currently ongoing work ability reform.

Editor: Aili Vahtla

Source: BNS

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