IW labor market forecast 2027: Immigration can compensate for ageing

The extrapolation results in an average annual employment growth of 537,000 people or 1.6 percent per year from 2022 to 2027. Whether this employment growth actually occurs depends largely on whether the recent very positive trend in labor force participation continues, particularly among people aged 60 and over. Policy decisions are therefore important to further increase incentives to work longer and to reduce incentives to retire earlier.

The extrapolation assumes that an increasing proportion of the population is willing and able to take up employment subject to social security contributions (participation effect of 626,000 employees per year). This is partly at the expense of other forms of employment (self-employed, civil servants, mini-jobs and others). Given the forthcoming company handovers and the relatively low level of start-up culture in Germany, it is recommended that incentives for self-employment be enhanced. This will have a beneficial impact on levels of employment.

The impact of demographic change could be offset by net immigration (cohort effect of -283,000 versus immigration effect of +285,000) if this level of immigration is maintained. In last year's extrapolation, only a balance of 70 per cent was foreseeable. The immigration trend has increased significantly due to the record immigration from Ukraine in 2022. However, the participation rate of foreign nationals fell in 2022, as many refugees only enter the labor market after a delay. After the high level of refugee immigration in 2015, there were notable integration successes in the following years that need to be repeated - which the extrapolation assumes based on its modeling.

To increase skilled immigration, the opportunities offered by the amended Skilled Immigration Act (Fachkräfteeinwanderungsgesetz – FEG) should be used. However, most companies would need more support for this (cf. Burstedde et al., 2023). The new opportunities must also be communicated abroad. In practice, visa issuance and professional recognition must become faster. All of this requires additional resources.        

For better integration and the long-term retention of immigrants living in Germany, a welcoming culture practiced by the whole of society is necessary. This is because too many of the foreign skilled workers working here still move on to other countries or return to their country of origin.

The ongoing prevalence of unemployment is not expected to make a significant contribution to employment growth in the period under review (unemployment effect 1,300). This was not the case in last year's update. Unemployment is now expected to rise slightly in western Germany, while it should continue to fall in eastern Germany. It is therefore important to provide the unemployed with even more intensive training and support, while at the same time motivating them more strongly to take up employment.

East Germany has the potential to surpass West Germany in terms of employment growth and skills shortages. The impact of demographic change on the labor market in western Germany has been increasingly rapid since 2016, while in eastern Germany it had already reached a plateau by 2019.

The proportion of skilled workers with vocational training among all employees is anticipated to decline further. However, this should not be confused with a decrease in demand, as the shortage of trained workers is set to intensify. The situation is expected to worsen, particularly in eastern Germany. There is a need to foster greater enthusiasm for training and its opportunities. To achieve this, it is crucial to strengthen career guidance in schools and enhance career counseling for young people. Additionally, it is vital to align vocational preparation with practical experience in companies to the maximum extent possible.

In general, there is a sufficient supply of low-skilled workers to meet the demand for labor in this segment of the labor market. Staffing problems here are primarily due to regional and job fit problems.
Of the larger occupational main groups, the relative increase in employment is most notable in IT occupations (+27.1% from 2022 to 2027). Metalworking occupations are expected to experience the sharpest decline (-12.8%). A quarter of this is attributable to metal construction specialists, which are also among the occupations with the greatest shortage of skilled workers. They are an example of the effects of demographic change. In industrial occupations as a whole (occupational area 2), employment has almost stagnated (0.5 percent).

At the level of individual occupations, the largest increase in employment is likely to (continue to) be among child-care workers (around 167,000). This is good news, as it encourages additional employment for parents. The largest reduction in employment is now expected for metalworkers (-62,779 or -25.9%), who have overtaken trained bank clerks (-59,940 or -15.9%).

The IW labor market extrapolation update is approximately six months behind schedule. In order to ensure an accurate interpretation of the results, note the following developments, which are not yet included in the data used for the update:

• The economy is currently weak. The ifo Business Cycle Clock has been set to crisis since September 2022 (ifo, 2024). The extrapolation does not include an economic forecast and is based on the assumption of an average economy over the five-year extrapolation period. The results are therefore bound to be more optimistic than the actual current trend. Employment growth recently reached only 183,000 (from April 2023 to April 2024; BA, 2024). It is possible that an economic countermovement could compensate for this. However, should this not occur, future projections will assume a structurally weaker growth path.
• The skilled labor shortage declines slightly to an annual average of 573,000 in 2023 (Kunath et al., 2024), slightly more than in the projection results. This is plausible given the weak economy. However, the shortage of skilled workers remains at a very high level despite all the crises. There are currently no signs of an easing in the labor market.
• The 2022 census (Destatis, 2024) showed that 1.4 million or 1.6% fewer people live in Germany than previously assumed. About two-thirds of this is due to the foreign population. When people return from abroad, they often do not deregister and are therefore not recorded in the population statistics. This means that the participation rates of foreigners are actually higher than could be calculated in the update.
• The energy price crisis in 2022 and its effects have so far hardly been reflected in the results of this year's update, as the employment structure reacts with a time lag to changes in investment and location decisions. It will be interesting to see what changes in the occupational mix will be reflected in the next update.