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Michael Hüther / Markos Jung / Thomas Obst IW-Policy Paper No. 10 10. May 2021 Workforce Potential of the German Economy: Opportunities for Growth and Consolidation

Germany’s labor market faces substantial challenges caused by demographic change in the next decade. Looking back over the last 10 years, we observe a key role regarding of a successful labor market integration leading to higher employment rates and fostering economic growth.

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Opportunities for Growth and Consolidation
Michael Hüther / Markos Jung / Thomas Obst IW-Policy Paper No. 10 10. May 2021

Workforce Potential of the German Economy: Opportunities for Growth and Consolidation

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Germany’s labor market faces substantial challenges caused by demographic change in the next decade. Looking back over the last 10 years, we observe a key role regarding of a successful labor market integration leading to higher employment rates and fostering economic growth.

Indeed, we can look back at a ‘golden decade’ of increased employment and rising nominal wages in the German labour market. This positively impacted on the tax revenue base as well as social contribution payments which led to a successful consolidation of the state budget. This trend, however, came to an end with the outbreak of covid-19 in the beginning of 2020. Current forecasts project a shrinking labour force due to demographic change in the next decade. This will cause falling labour volumes in the economy and weaken potential output. In contrast, this paper outlines three strategies on how to utilise the existing labour force potential and hence make different growth paths out of this crisis visible. In the context of a European country comparison, we thereby consider a bandwidth of political options and analyse which labour market potentials can be expected post-Corona. The aim is not to give a precise forecast but rather to assess and compare the impact of different determinants on the German labour market potential. Our motivation is to provide different levers for policymaking during the next decade. 

A country comparison with Sweden and Switzerland reveals that even though the employment rate has already substantially increased in Germany since 2005 there are still important hidden labour market potentials which can be utilised by setting a suitable economic policy framework during the next decade.  Raising the employment rate towards the Swiss level would imply an additional 1.15 Million employees and an increase of 1.83 billion labour hours in total (participation effect). Given the existing labour market potential in Germany this is not unrealistic. Current labour force potentials include female workers in (involuntary) part time, a better labour market integration of the marginally employed and non-EU foreigners, as well as the successful reduction of under-employment. In this context, the essential policy lever concerns the volume of work (time effect): An alignment of weekly working hours as well as annual working weeks in Germany with the (higher) average values of those in Sweden and Switzerland would raise the annual labour volume to 4.71 billion working hours. A reduction of involuntary part time work in Germany would imply an increase of 691 million working hours. Taken together with the participation effect (1.83 billion hours) this constitutes a maximum aggregate volume of labour of 7.23 billion additional hours which could be mobilised over the next decade. 

Even though it does not seem likely to assume that a positive net participation effect like the one observed over the past ‘golden decade’ in the German labour market will occur again, this paper shows that ambitious policy reforms concerning labour volume (part time, working weeks and annual working hours) could compensate for the shrinking labour force due to demographic change over the next decade. A better utilisation of the existing labour force potential can thus contribute to tackle the adverse effects of demographic change and enable a state budget consolidation. However, this requires political courage to initiate the policy reforms needed to mobilise and elevate the labour force potential in Germany over the next decade. 

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Opportunities for Growth and Consolidation
Michael Hüther / Markos Jung / Thomas Obst IW-Policy Paper No. 10 10. May 2021

Workforce Potential of the German Economy: Opportunities for Growth and Consolidation

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Significant progress in labor market integration despite pandemic
Wido Geis-Thöne IW-Report No. 31 30. August 2021

Significant progress in labor market integration despite pandemic

The first lockdown in spring 2020 had a negative impact on the labor market integration of refugees in Germany.

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Alexander Burstedde / Helen Hickmann / Sebastian Schirner / Dirk Werner IW-Report No. 25 24. July 2021

Without immigration, the potential workforce is already shrinking

Demographic change has been foreseeable for a long time, but has not always led to forward-looking policies. This study shows that demographic change is accelerating significantly and thus requires decisive and timely action.

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