The Demographic Challenge: Fewer Workers, More Dependents
In recent decades, the birth rate has significantly decreased in most OECD countries, falling below replacement levels. Simultaneously, life expectancy has increased, with people enjoying good health for a larger portion of their lives. Consequently, the working-age population (20 to 64 years) is shrinking in many OECD countries. Between 2023 and 2060, the working-age population is projected to decrease by 8% in the OECD area and over 30% in a quarter of its member countries, with extreme cases like South Korea expecting a 46% reduction.
This combination of low fertility and increased longevity has led to a surge in the “old-age dependency ratio,” which is the proportion of people aged 65 or older relative to the working-age population. This ratio rose from 19% in 1980 to 31% in 2023 and is expected to reach 52% by 2060, nearly tripling its 1980 level. This implies that, on average, each working-age person in an OECD country will need to support themselves and provide more than half of the income for a retired person, exceeding 70% in some countries. This situation is unsustainable and concerning.
Impact on the Labor Market and the Need for Solutions
Despite growing demographic pressures, OECD labor markets have shown resilience recently, with employment and labor force participation reaching historical highs while unemployment remains historically low. However, employment growth is slowing down, and labor market rigidities are returning to pre-pandemic levels in many countries and sectors. Real wages are growing, but they have yet to recover pre-2021 levels in half of the OECD countries, although minimum wages have proven more resilient.
According to the OECD’s Employment Outlook 2025, released recently, to counteract the slowing GDP per capita growth, it is crucial to mobilize “untapped talent pools.” The OECD identifies four key groups:
1. Young People
In nine OECD countries (Colombia, Costa Rica, Greece, Italy, South Korea, Lithuania, Mexico, Spain, and Turkey), over 15% of young people (15-29 years) are not employed, in education, or in training (NEET), representing a significant loss of potential. Reducing these rates and fostering youth employment through better education and national school-to-work transition strategies are essential.
2. Women
Although progress has been made, significant differences persist in the level and quality of female employment, including lower wages, fewer paid hours, and more unpaid work. Policies promoting STEM education for women, family-friendly work environments, and affordable, high-quality childcare and eldercare are crucial. Closing the gender employment gap, particularly in later career stages, can generate substantial growth dividends.
3. Regular Migrants
In many countries, migrants already contribute to maintaining working-age populations and alleviate labor shortages in strategic sectors. They are also overrepresented among self-employed workers and contribute to tax revenues and job creation. However, their potential to significantly boost economic growth is limited unless net migration rates increase considerably, which in turn requires careful management of housing, education, and other public services.
4. Older Workers
They represent a “hidden key” to addressing labor shortages. Given increased healthy life expectancy, there is substantial potential to improve employment rates among workers aged 60 or older. However, they face challenges such as declining information processing skills with age, physically demanding jobs, and age discrimination. Policies should focus on lifelong learning, continuous skill development, career counseling, flexible work arrangements, and combating age discrimination, as well as aligning wages with performance rather than seniority.
Productivity and Labor Mobility
The aging of the labor force also raises concerns about productivity growth. “Job restructuring for growth” primarily occurs through labor mobility between jobs (voluntary transitions to more productive and better-paying companies), which is crucial for aggregate salary and productivity growth. This mobility accounts for a significant portion of the variation in salary growth (56%) and productivity (41%) between countries.
Aging of the labor force tends to slow down labor mobility. Policies promoting business flexibility and supporting labor mobility between companies, especially for middle-aged and older workers, are therefore essential.
As argued in the OECD’s Employment Outlook 2025, the “demographic squeeze” is a multifaceted challenge requiring difficult yet intelligent policy decisions. Only an integrated strategy that mobilizes the employment potential of young people, women, migrants, and crucially, older workers, can mitigate the impact of aging on economic growth and ensure sustainable living standards in OECD countries and many others.
