The UK faces a labour shortage time bomb caused by low fertility rates and an ageing population, according to a report from the World Economic Forum (WEF).
The WEF predicts that the UK labour force will start to shrink in 2010, declining further during the 2020s and only easing in the 2030s. It also anticipates a 66 per cent rise in old age dependency rates between 2000 and 2030 and an increase in the total dependency ratio of more than 27 per cent.
Left unchecked, this could cripple economic growth and place government finances under huge strain as the costs of retirement systems will significantly increase. This begs the question whether pension systems should be or financed on a “pay-as-you-go” basis and how changes in living standards are allocated across segments of society supremely important – especially in light of the slowing labour force growth.
"Economic output is determined by labour force growth and productivity rates," said Richard Samans, managing director at the WEF's Institute for Partnership and Governance.
"In countries with significant projected labour shortages, the supply of goods and services may not meet demand and standards of living."
While all the world’s leading developed countries face similar shortages, the problem is predicted to be worse in the UK because of the low levels of labour force participation – too many people are unemployed or long-term sick – while the participation of older people in the labour force is particularly low.
The EU as a whole will experience a significant decline in its working-age population over the next 30 years. In Italy, for example, retirees will outnumber active workers by 2030.
In India, on the other hand, the number of working-age people will increase by 335 million by 2030 – almost as much as the total working-age population of the EU and the United States combined in 2000.
Among the remedies the report proposes for governments and business are increased immigration, capital deepening, technology investment and enticing additional workers into the labour force. They are also urged to develop ways to tap surplus labour pools in developing countries through greater economic integration than ever before.
"We all face a daunting task," said Samans. "If the impending labour shortages are not properly addressed, business and society will have to answer many difficult questions to avoid pitting the needs of the working-age and retiree populations against each other.
"The good news for now, however, is that there are a number of ways out, but finding them will require us to recognise that this is more than an issue of social security plan benefits and taxes. Fundamentally, it is a question of finding ways to improve economic growth and integration."