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

BERLIN—Germany has long been ahead of the curve as a source of technical innovation and manufacturing. Now it is leading much of the developed world toward a demographic cliff edge that could put a damper on Europe’s largest economy, raising pressure on its pension system and pushing inflation higher for years to come.

Economists forecast that Germany’s workforce could peak as soon as 2023 and then shrink by up to five million people by the end of the decade. While the pandemic has exacerbated the trend, it is the impending retirement of the baby boomers that is fueling the labor crunch, economists say.

At Jänicke GmbH & Co.KG, which builds pools and heating systems, as many as five of its 17 employees are due to retire in the next few years. To replace them, the company—located some 40 miles southwest of Berlin—is already looking for new applicants since they need to undergo a three-year-long training. That is proving to be a challenge.

“It’s really hard to find any craftsmen nowadays,” said Anja Jänicke, the company’s human resources manager who spends her days contacting local schools and maintaining an Instagram page to attract new recruits. “And looking ahead, it certainly doesn’t look like it’s going to get easier.”

Germany was one of the first in Europe to experience a sharp drop in birthrates after World War II, as early as the 1970s. This means its fate could be the shape of things to come for other mature economies that are still behind the demographic curve.

The U.S. labor force is expected to increase to around 170 million by 2030 from 161 million last year, according to the Bureau of Labor Statistics. After that, however, most baby boomers would reach retirement age, capping labor-force growth.

Germany wants to encourage its citizens to stay in work for longer before retiring and liberalize migration and citizenship rules.

The crunch could turn some of the core premises of current-day economic policy on their heads after successive governments in developed countries focused on creating jobs to stave off unemployment. In a world of scarce labor, economists say policy makers will have to focus more on boosting growth and fighting inflation, an economic scenario more reminiscent of 1970s-style stagflation.

“The standard of living will no longer be able to rise as usual—unless countermeasures are taken,” the German Economic Institute said in November. “Politicians and companies are now called upon to avoid prolonged stagnation.”

Germany’s new coalition government under Chancellor

Olaf Scholz

calls the labor shortage one of the major obstacles to economic growth. The administration is looking to raise the female participation rate in the workforce, entice workers to stay in work for longer before retiring and liberalize migration and citizenship rules. The government would offer courses to help migrants with their integration and facilitate quick access to schooling for their children.

German companies are already struggling to fill positions, with many offering perks such as subsidized meals or on-site nurseries as well as financial incentives to keep older workers for longer. At the beginning of the fourth quarter, a shortage of skilled workers hampered business activity of 43% of German companies, according to a survey by the KfW state-owned development bank and the Ifo economics think tank—the highest rate since Germany’s 1990 reunification.

To attract workers, the east German city of Hoyerswerda, where the population is already shrinking, is staging a bus tour called the “Late Shift” where young people and their parents don yellow hard hats and visit engineering companies in the region.

“We need to do something because there are many people who are going to retire soon,” said Hoyerswerda’s mayor Torsten Ruban-Zeh. “And the young people who would have to replace them are simply not there.”

Cultural and societal trends are compounding the problem. Germany already has the lowest number of hours worked per person a year in the Organization for Economic Cooperation and Development. That is partly because many Germans are retiring early and given generous pension offers.

The participation rate of women in the labor force, meanwhile, at 57% in 2019 compared with 67% for men, is lower than in the U.S. and some other European countries, according to OECD data.

Many women reduce working hours after giving birth because of limited child-care availability and tax-splitting rules,

Deutsche Bank

says, which allow couples with big differences in income to be taxed at a lower rate as a couple than they would be as individuals. Economists have long said the rule acted as a disincentive for women to rejoin the workforce full time because they would be taxed more.

German companies are offering perks such as subsidized meals or financial incentives to keep older workers for longer.

The implications of the demographic deficit are far-reaching.

It could drive the potential economic growth rate to below 0.75% as soon as by 2025, from nearly double that rate before the pandemic, according to Deutsche Bank. This, in turn, would damp cyclical resilience—the economy’s ability to absorb economic shocks—and make it hard to work out debt, the bank says.

The demographic problems also threaten to make Germans’ cherished pay-as-you-go pension scheme unsustainable. The state is already topping it up with tax revenue, but economists say higher contributions and lower payouts will be needed soon. Germany spends over 100 billion euros, or $112.87 billion dollars, the equivalent of around a quarter of its federal budget, on the program, a level that could rise to half of the budget by 2040, according to Jörg Krämer, chief economist at Commerzbank.

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

Economists also warn that inflation, a historically sensitive topic in Germany, could rise as a reduced supply of labor leads to rising wages, adding another big bottleneck in an economy where manufacturing is currently suffering from shortages of chips, steel, construction materials, and from rising energy prices.

“There are good reasons to assume that the deflationary trends that we have seen over the past 30 years because more people entered the labor market could reverse,” said Fritzi Köhler-Geib, KfW’s chief economist. “With the baby boomers retiring en masse in Germany soon, this will be an issue here.”

To plug the widening demographic gap, Germany needs more than 400,000 net immigrants a year, the country’s Federal Employment Agency estimates. However, economists expect half that level amid limited social and political willingness to accept high immigration in the aftermath of the 2015 refugee crisis. Language, professional qualifications and bureaucratic hurdles are also obstacles.

Only 16% of companies surveyed rely on the recruitment of skilled workers from abroad, according to a study of 7,500 executives by the Bertelsmann Stiftung think tank published last month.

Welder Joachim Schneider, who says the labor market in Germany hasn’t been this tight in his nearly 30 years in the business, is open to hiring foreign workers, though he foresees some challenges in integrating them.

“Language can be a problem and the training and education abroad is different,” Mr. Schneider, the owner of Otto-Schneider Werkzeuginstandsetzung GmbH in Dresden, said. “And there are prejudices, too, foreigners are sometimes seen differently here.”

No economic sector is spared by the looming shortage, with many government employees due to retire in the next decade and IT specialists already in short supply.

In Hoyerswerda, Mr. Ruban-Zeh, says he hopes that Russian and Kazakh doctors and care workers from Afghanistan and Syria can help bridge the deficit in the health sector. The federal employment agency also signed an agreement with Indonesia in August to recruit local nursing staff who will get linguistic and job training in Indonesia for several months before they move to Germany.

The German Foundry Industry Association says around a third of its experienced skilled workers are about to retire in the next few years but…

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