Aging Germany Is Running Out of Workers, Putting Europe’s Largest Economy at Risk

In the last decade, Germany has continued to grow and expand its workforce. However, with an aging population nearing retirement age in record numbers and a lack of workers coming into the market as immigrants leave for other countries, it’s unclear how much longer this can continue.

As Germany ages, the country is running out of workers. This puts Europe’s largest economy at risk and could lead to a recession.

BERLIN— As a source of technological innovation and production, Germany has long been ahead of the curve. It is already leading most of the industrialized world into a demographic cliff, which may stifle Europe’s biggest economy by putting strain on its pension system and driving inflation higher for years to come.

Economists predict that Germany’s workforce would peak in 2023, then shrink by up to five million by the end of the decade. According to analysts, although the epidemic has aggravated the trend, the looming retirement of the baby boomers is exacerbating the labor shortage.

Five of the 17 workers of Jänicke GmbH & Co.KG, which develops pools and heating systems, are set to retire in the next few years. The firm, which is situated around 40 miles southwest of Berlin, is already seeking for fresh candidates to replace them since they must complete a three-year training program. That is proving to be a difficult task.

“It’s quite difficult to get any artisans anymore,” said Anja Jänicke, the company’s human resources manager, who spends her days calling local schools and maintaining an Instagram profile to recruit new employees. “And it doesn’t seem to be getting any simpler in the near future.”

As early as the 1970s, Germany was one of the first countries in Europe to see a significant reduction in birthrates after WWII. As a result, its destiny may be a foreshadowing of what is to come for other developed countries that are still behind the demographic curve.

According to the Bureau of Work Statistics, the labor force in the United States is predicted to grow to roughly 170 million by 2030, up from 161 million last year. However, most baby boomers would reach retirement age after then, putting a stop to labor-force expansion.

Germany aims to encourage residents to work for extended periods of time before retiring, as well as liberalize immigration and citizenship regulations.

After successive administrations in industrialized nations concentrated on generating jobs to fend off unemployment, the crunch might flip some of the key premises of contemporary economic strategy on their heads. In a world of limited labor, experts predict that policymakers will have to concentrate more on promoting growth and combating inflation, a situation that is more akin to stagflation in the 1970s.

“Unless remedies are implemented, the quality of life will no longer be able to increase as normal,” the German Economic Institute said in November. “Politicians and businesses must now work together to avert protracted stagnation.”

The labor shortage is one of the greatest hurdles to economic development, according to Germany’s new coalition government led by Chancellor Olaf Scholz. The government wants to increase female participation in the economy, encourage employees to work for longer periods of time before retiring, and relax immigration and citizenship laws. The government would provide courses to aid migrants’ assimilation and make it easier for their children to attend school.

Companies in Germany are already having trouble filling jobs, with many giving amenities like subsidized lunches or on-site childcare, as well as financial incentives to retain older employees for extended periods of time. According to a poll by the KfW state-owned development bank and the Ifo economics think tank, a scarcity of trained employees impeded the commercial activity of 43 percent of German enterprises in the first quarter of this year—the highest percentage since Germany’s reunification in 1990.

To recruit employees, the east German city of Hoyerswerda, whose population is already dwindling, is hosting a “Late Shift” bus trip, in which young people and their parents wear yellow hard helmets and visit engineering enterprises in the area.

“We need to do something since many people are about to retire,” said Torsten Ruban-Zeh, mayor of Hoyerswerda. “And the young people who would be required to replace them just aren’t available.”

The issue is being exacerbated by cultural and social tendencies. In the Organization for Economic Cooperation and Development, Germany already has the lowest number of hours worked per person each year. This is also due to the fact that many Germans are retiring early and being offered big pensions.

Women’s labor force participation, at 57 percent in 2019 compared to 67 percent for males, is lower than in the United States and certain other European nations, according to OECD statistics.

Because of restricted child-care availability and tax-splitting provisions, which enable couples with large income disparities to be taxed at a lesser rate as a pair than they would be as individuals, many women cut their working hours after giving birth, according to Deutsche Bank. Economists have long claimed that the provision discourages women from returning to work full-time since they would be taxed more.

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Companies in Germany are providing benefits such as subsidized lunches and cash incentives to keep elderly people on the job for longer.

The demographic gap has far-reaching consequences.

According to Deutsche Bank, the projected economic growth rate might fall to 0.75 percent by 2025, down from roughly twice that rate prior to the epidemic. According to the bank, this would reduce cyclical resilience—the economy’s capacity to absorb economic shocks—and make debt repayment difficult.

The demographic challenges also pose a danger to Germany’s beloved pay-as-you-go pension system. The state is currently contributing, but economists predict that bigger payments and lesser rewards will be required shortly. According to Jörg Krämer, chief economist at Commerzbank, Germany spends over 100 billion euros, or $112.87 billion dollars, on the program, which equates to around a quarter of its federal budget. By 2040, that figure might climb to half of the budget.

Mr. Krämer said, “We already don’t spend enough on investments, so this would be a disaster.”

Economists also warn that inflation, a historically sensitive issue in Germany, might grow if a lower labor supply leads to higher salaries, creating yet another bottleneck in an economy already beset by semiconductor, steel, and building material shortages, as well as increasing energy costs.

“There are excellent grounds to believe that the deflationary tendencies we’ve witnessed over the last 30 years as more people joined the labor market might turn,” said Fritzi Köhler-Geib, chief economist at KfW. “With the baby boomers going to retire en masse in Germany, this will be a problem.”

According to Germany’s Federal Employment Agency, the nation need more than 400,000 net immigrants each year to close the growing demographic imbalance. In the context of the 2015 refugee crisis, however, analysts estimate half that amount due to a lack of social and political readiness to support significant immigration. Language barriers, professional credentials, and bureaucratic roadblocks are all potential roadblocks.

According to a poll of 7,500 executives released last month by the Bertelsmann Stiftung think tank, just 16 percent of firms questioned relied on the recruitment of talented personnel from overseas.

Welder Joachim Schneider, who says the labor market in Germany has never been this tight in his almost 30-year career, is willing to hire foreign employees, though he anticipates some integration issues.

Mr. Schneider, the proprietor of Otto-Schneider Werkzeuginstandsetzung GmbH in Dresden, said, “Language might be a difficulty, and training and education overseas are different.” “There are also biases; outsiders are sometimes seen in a different light here.”

With many government officials expected to retire in the coming decade and IT professionals now in short supply, the projected deficit affects every economic sector.

Mr. Ruban-Zeh, in Hoyerswerda, says he hopes Russian and Kazakh physicians and care workers from Afghanistan and Syria will assist bridge the health-care gap. In August, the federal labor agency reached a deal with Indonesia to recruit local nursing personnel who would get language and work training in Indonesia before moving to Germany.

According to the German Foundry Industry Association, a third of its veteran skilled employees will retire in the next few years, yet there are now less candidates than jobs available. To promote the sector to young people, the group is doing advertisements on TikTok and Snapchat, as well as employing virtual reality headsets.

An employee at Jänicke took a selfie video while wandering around a construction site and discussing the work.

“Have you considered becoming a craftsman?” But you thought, well, it’s all dirt and lugging and rubbish, right? That, on the other hand, is entirely out of date. We now use sophisticated instruments and laser technology,” says the film, which was shared on the company’s social media platforms. “It’s a lot of fun to earn money this way.”

Georgi Kantchev can be reached at georgi.kantchev@wsj.com.

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Germany is running out of workers and this could put the economy in danger. The country’s population issues are due to a low fertility rate and an aging workforce. Reference: germany population issues.

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