Demographic change poses a huge challenge for the German economy. Inevitably, this change will have a decisive impact on the current decade: the baby boomers of the 1950s and 1960s will move into retirement; As a result, the potential workforce will shrink significantly. But unfortunately, large parts of politics and society lack the insight into how comprehensive and profound our answers should be.
Because if we don’t take a massive stand against this, Germany’s economic power will also shrink: human labor is still indispensable for generating prosperity. Certainly, technical progress and the growing capital intensity of the economy have so far ensured that the use of labor has led to ever greater prosperity. Then why not the other way around: the same level of prosperity with less work? This is mathematically quite conceivable.
But in order to achieve this in real life, it is important to encourage companies to continue to expand their capital stock in this country and invest in their ability to innovate. Then the growing labor productivity could compensate for the decline in work volume. Government investments can be helpful, but the economy is not a simulation game: companies will only (be able to) invest where it makes economic sense for them.
If labor becomes increasingly scarce, employees will initially be able to negotiate increasing wage levels for themselves. But they will not only tend to have to give up more and more of this to supply the inactive population. The basis for their employment is also likely to erode, because it is becoming more and more attractive for local companies to relocate activities abroad and less and less attractive for foreign companies to invest in Germany.
Since demographic change threatens to massively reduce the attractiveness of the location, it is important to look for ways to compensate for this loss of attractiveness. A current study by acatech – German Academy of Engineering Sciences[1] To this end, we identify a triad of fields of action:
Firstly, the decline in labor supply would have to be counteracted directly. The potential to further increase domestic labor force participation would primarily include a higher number of working hours for part-time employees and a longer working life. The prerequisites for this would be a decisive expansion of the infrastructure for care and nursing as well as a willingness to reform the organization of old-age security. In addition, international labor migration would need to be expanded. So far, the bureaucratic requirements, the lengthy analog administrative processes, for example when issuing visas, and a lack of service culture in the offices have all too often proven to be a major obstacle.
Secondly, it is important to increase the quality of the labor supply in order to justify the increased wage level from the companies’ perspective through high (marginal) productivity and in this way to secure the demand for labor. The state education system is primarily responsible for giving students the ability to learn for life through comprehensive basic education and also empowering them to make good career decisions for their own benefit – and that of the economy.
Thirdly, economic policy should not only focus on the labor market. The attractiveness of providing jobs is not determined there alone. Incentives to invest in capital goods, particularly in digitalization and automation, could significantly increase labor productivity. This requires a lean and digitalized administration, a reliable infrastructure, lower burdens from taxes and duties, and more transparent and pragmatic regulation. Above all, all of this requires a willingness to reform and a clear commitment to economic performance – little of which can be seen at the moment.
[1] Achleitner, Kussel, Pavleka, Schmidt: Innovation system Germany – Supporting the securing of skilled workers in Germany (acatech STUDY)Munich 2023. DOI:
A notice: The article appeared in a modified form as an editorial in Heft 9 (2023) the specialist journal WiSt.
RWI – Leibniz Institute for Economic Research
Ruhr-University Bochum