Germany has come out of the global economic crisis stronger than any other country in Europe, with record low unemployment and fiscal surpluses. But the country’s aging population threatens long-term growth as the total size of Germany’s labor force falls. According to Societe Generale analyst Anatoli Annenkov, growth could fall below 1 percent by 2020 if measures aren’t taken to mobilize more people into the work force.

German unemployment  rate

German unemployment has fallen in the last three years, just as unemployment has been going up across the rest of the euro zone. Part of this is due to labor unions accepting lower wages to reduce layoffs and the institution of ‘mini-jobs’ that are extremely low paying, part-time work, but of course strong exports and currency weakened by the euro zone periphery have helped as well.

German Unemployment Rate

But with an aging population, Germany’s labor force has hit an inflection point and is beginning to gradually decline, from just under 44 million now to 40 million in the 2020s.

German shrinking labor

Labor market reforms

“Major efforts will be needed in order to mobilise sufficient labour supply, in the order of some 200,000 workers per year, to stabilise potential growth,” says Annenkov. He argues that sweeping labor market reforms are necessary including, “employment protection for regular workers and high tax wedges, increase availability of child care and all-day schools, as well as reducing the high marginal tax rates for second earners, to boost full-time female participation, while also significantly raising immigration.”

Raising the retirement age to 65 has kept people from exiting the labor force as quickly, and some progress on the immigration front has already been made, with a negative net migration rate in 2007-2008 turning positive and trending steadily upwards, but more needs to be done and Annenkov worries that the issue isn’t high enough on the national agenda.

“While the current government is well aware of these challenges and has put in place several measures, these measures still appear inadequate,” he says.

net migration to germany

German national elections are just a few weeks away, but most people don’t expect much the balance of power to shift much (and who can blame them, when current leadership has steered them through the economic crisis), meaning these ‘inadequate measures’ are unlikely to change.