If somebody reviews the labor market of Luxembourg  in recent decades will observe  that the Grand-Duchy has experienced a large increase in the active population together with an increase in the number of employed persons and for the most part, relatively low unemployment rates. With an eye to the future, it is reasonable to raise the question whether these increases constitute a temporary phenomenon or if they are expected to be continued.What is the evolution of the labor force expected to be like? Will the female participation rate catch up with the male rate? This blog comes to provide some related answers.

Idea, true-blue to its role to initiate the social debate on subjects related to the sustainable development of the Grand-Duchy of Luxembourg, continues the publication series related to the labor market with a blog using an alternative perspective.

Idea has developed a tool (intrinsically connected to the tool developed for the demographic projections[1]) to obtain projections for the labor market following the methodology which has been put forward by the Ageing Working Group (AWG) Report 2015[2] and all the preceding literature on the subject[3]. This tool provides the ability of replicating the AWG Baseline scenario and performs sensitivity analyses simulating alternative scenarios by changing the underlying assumptions at will.

We can make sensitivity projections under many different scenarios with respect to participation rates, entry and exit rates from the labor market, minimum retirement age, unemployment expectations etc. However, here we present just two scenarios: the Baseline and the Convergence. The objective of this blog is not to “endorse” any of these two scenarios, but rather to initiate a debate about the labor market evolution in Luxembourg and the related challenges and questions.

It is always important to bear in mind that there is a significant and widening band of uncertainty surrounding any projection, especially over long horizons. The rationale behind projections always follows the same principles: taking into consideration some assumptions, we try to project what will be the situation like in the future, postulating that the assumptions will hold. It is straightforward that this concept contains risk, not only concerning the consistency of the assumptions but also many exogenous and unpredictable factors. The task becomes even more complicated especially when we make projections for Luxembourg, a country with many special features (high rate of cross-border workers, very high openness of the economy, high net migrations, etc.).

In what follows we present a description of the data, the underlying assumptions and results of the Baseline and Convergence scenarios.

Data

We have used  data published by Eurostat from the Labor Force Survey series (LFS) covering the period from 1995 to 2013. The data include the participation rates in quinquennial age groups from 15 to 74 separately for men and women. In simple words, the participation rate is the quotient of active persons (the sum of employed and unemployed persons but searching for a job) of an age group, divided by the total population of that age group[4]. We have also used the population projections that we have obtained using our model[5].

Baseline scenario

We have focused only on national employment, meaning that everything that is mentioned in this blog refers exclusively to residents of Luxembourg and we therefore exclude from the analysis cross-border workers. For simplicity reasons, we don’t segregate between full and part time workers and we assume no changes in the pension scheme. Under the baseline case, we follow the same steps as these of the Ageing Working Group and we obtain almost the same results. Specifically, we calculate the average entry and exit rates from the labor market per age group separately for males and females and we assume that these will remain unchanged during the projection horizon. We don’t allow the participation rates for the age bracket 15-19 and 20-24 to decline, although they have historically declined mostly due to a longer stay in school. Regarding the unemployment rate[6], it is considered exogenous and we have used the Non-Accelerating Wage Rate of Unemployment (NAWRU) (the rate of unemployment below which inflation rises) as a proxy for the structural unemployment rate (structural unemployment reflects  the mismatch between the available jobs in the economy and the skill levels of the unemployed). Specifically, in congruence with the AWG, we allow unemployment rates to converge to NAWRU rates by 2040 and then remain stable at this rate.

Table 1. Baseline scenario, projections of active population aged 20-64, employed population (for corresponding exogenous unemployment rates), number of more jobs than 2013 that are needed.

  2020 2030 2040 2050 2060
Exogenous total unemployment rate 5.1% 4.3% 4.2% 4.2% 4.2%
Total active population (20-64 ) 305884 375309 433542 463853 474358
Endogenous number of resident jobs 290284 359171 415334 444371 454435
Net change in number of jobs required per decade 56884[i] 68887 56162 29037 10063
More jobs than 2013 56884 125771 181934 210971 221035

Source: Eurostat, Calculations Idea

Table 1 presents the results of our simulation for the baseline scenario. We need to shed some light on the content of the third and the fourth row. The third row reflects the number of jobs that should exist in Luxembourg, under the projected demographic changes and the projected participation rates,  in order for the unemployment rate of the resident population to be that of the first row. The fourth row presents the required net change in the number of jobs per decade i.e. from 2020 to 2030 should be 68887 etc. According to the pattern of net job change needed, the required net change is increasing until 2030 and decreasing afterwards. It is important to highlight that according to the population projections in order to have an unemployment rate of 4.2% in 2060 the number of jobs should almost double, compared to the number of jobs in 2013. It is also substantial to stress out that the decade with the most prominent changes will be that of the 2020’s (i.e from 2020 to 2030), when the active population will increase by almost sixty-nine thousands persons and the net change in the number of jobs compatible with an unemployment rate of 4.3% in 2030 is needed to be slightly less than sixty-nine thousands. Onwards the values slowly decline in absolute numbers reaching ten thousands net change in the  number of jobs in 2060.

Convergence scenario of female participation rates to male participation rates in the middle of the horizon

The most prominent cause of change in the future labor market is the women participation rates. From a historical perspective, male participation rates remain quite high and especially for the age group 25-54 fluctuate around 94%, a trend which is expected to hold in the future. Conversely, women participation rates have increased during the last 25 years, primarly reflecting social trends. Provided that young women have a stronger attachment to the labor market and will gradually replace older women with relatively low participation rates, it is expected that female participation rates will continue to increase in the future. Holding the same assumptions as the baseline scenario and taking into consideration these expectations, we simulate the impact of the increasing women participation rates particularly of prime age women (i.e women aged 25-54). We perform the simulation under the assumption that the participation rates of prime age women will converge to these of men in the middle of the projection horizon. This simulation is conducted in order to demonstrate the future impact  of the increased women participation rate in the labor market scheme. We have assumed that the participation rates will converge in a linear way.

Table 2. Convergence scenario, projections of active population aged 20-64, employed population (for corresponding exogenous unemployment rates), number of more jobs than 2013 that are needed.

  2020 2030 2040 2050 2060
Exogenous total unemployment rate 5.1% 4.3% 4.2% 4.2% 4.2%
Total active population (20-64) 305030 374804 438827 472302 484691
Endogenous number of resident jobs 289473 358688 420396 452465 464334
Net change of number of jobs required per decade 56073i 69214 61708 32069 11869
More jobs than 2013 56073[ii] 125288ii 186996 219065 230934

Source: Eurostat, Calculations Idea

Table 2 displays the results of the simulation. The net change of number of jobs required follows the same pattern as in the baseline scenario. Similarly to the baseline scenario the biggest changes are observed during the 2020’s (i.e from 2020 to 2030). More specifically in 2030 nearly seventy thousands more jobs than in 2020 and one hundred twenty-five thousands more jobs than in 2013 will be needed in order to achieve an unemployment rate of 4.3%, whilst in 2060 the number of jobs could almost double compared to 2013. In addition, comparing the two scenarios we observe that according to the convergence scenario, around five thousands additional jobs in 2040 and ten thousand jobs at the end of the projection horizon will be occupied by residents compared to the baseline scenario.

…instead of an epilogue…

In the presented analysis we projected and described what would be the number of new “resident” jobs in the Grand-Duchy for the forthcoming years under certain assumptions. We found that in order for the Luxembourg economy to experience an unemployment rate around the structural unemployment by 2060, the number of jobs occupied by residents would double. Such an increase in the number of resident workers entail many challenges: talented entrepreneurs able to set up competitive companies in Luxembourg to absorb the increasing labour force and a welfare state to provide the pledge (education, qualifications). Of course, challenges are not limited only in the labor market but also concern spatial planning, infrastracture needs, environmental and energy issues etc.  which will need to be tackled for the orderly function of the everyday life.


[1] Further information about the model can be found at: http://www.fondation-idea.lu/2015/07/08/the-one-million-luxembourg-a-global-analysis-is-needed/

[2] The 2015 Ageing Report, Underlying Assumptions and Projection Methodologies, European Economy 8|2014, http://ec.europa.eu/economy_finance/publications/european_economy/2014/pdf/ee8_en.pdf

[3] Burniaux J., Duval R., and Jaumotte F. (2003), »Coping with ageing: a dynamic approach to quantify the impact of alternative policy options on future labour supply in OECD countries« , OECD

Economic Department Working Papers, No. 371

Carone G. (2005): ‘Long-term labour force projections for the EU25 Member States: a set of data for assessing the impact of ageing’, DG ECFIN, European Economy, Economic Papers No.235

Scherer, P.(2002), “Age of Withdrawal from the Labour Force in OECD Countries”, OECD Labour Market and Social Policy Occasional Papers , No. 49, OECD

[4]Detailed description and definititions for the EU labor market methodology can be found at http://ec.europa.eu/eurostat/statistics-explained/index.php/EU_labour_force_survey_-_methodology

[5] See footnote 1

[6] The unemployment rate used is that of Eurostat which follows the ILO definition and is lower than the national measure. Further details for the distinction between the definitions can be found at: http://www.fondation-idea.lu/2015/11/23/blog-les-taux-de-chomage-du-luxembourg-une-question-de-definition/

[i] This number refers to the net change of number of jobs compared to 2013

[ii] A careful reader may notice that under the convergence scenario these numbers are slightly lower than the baseline scenario, this is because for some age groups the entry rates in the baseline scenario are higher than the convergence rates until the convergence is achieved.

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