Swedbank Baltic Sea Analysis No. 29

Swedbank Baltic Sea Analysis No. 29 27 October, 2011

Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000

E-mail: [email protected] www.swedbank.com Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720

Nerijus Mačiulis + 370 5 258 2237. Lina Vrubliauskienė +370 5 258 2275 Vaiva Šečkutė +370 5 2 58 2156

Unfavourable demographic changes in Lithuania require more active policy response

After the sudden decrease in Lithuania’s population in 2011, due to record-breaking registered emigration during 2010, its pace of decrease will gradually be slowing down during the next five years.

The milder decrease in labour force in 2011 and the experience of the other two Baltic countries suggests that actual emigration in 2010 was likely much lower than registered. This, however, implies a much higher actual emigration in previous years.

The working-age population will continue to decline more rapidly.Decline in labour force will be higher than all population but should be milder than decrease in working age population due to higher activity rate. Labour force will be aging faster as well, however, it should be possible to increase participation rates.

Age dependency ratio will rise due to increasing proportion of elderly and children, however, the burden for the employed will be decreasing due to increasing employment, at least for the next few years.

It is likely that fertility rate will become more important factor for the number of population change as emigration is to slow down and there are no signs of immigration policy change.

In the face of the aging population, low birth rates, high emigra-tion and sluggish immigration the efforts of policymakers should be targeted at increasing participation rates, easing of immigra-tion policy and sustaining higher fertility rates as well as ensuring soundness of public finances and sustainable growth.

Decreasing population and changing age structure

For the past ten years the size of the population was mostly influenced by the small number of births, as the negative difference between the num-ber of people who died and were born was higher than net migration most of the time till March 2009. After that date, the number of births started to increase more than deaths and emigration began increasing and immigration decreasing. May 2010 was a turning point, as the popu-lation, which had been decreasing by a few basis points every month,

The size of population was decreasing due to negative natural growth till 2009, when emigration took over.

2 Swedbank Baltic Sea Analysis No. 29 • 27 October, 2011

started to decrease by tens of basis points. The decrease became milder from December 2010 onwards, reaching 13-17 basis points every month.

Registered emigration skyrocketed in April 2010, as it suddenly increased from 2.1 thousands to 11.3 thousands per month – this extraordinary in-crease in registered emigration lasted until December 2010, although still remaining above the previous long-term average afterwards.

The natural change of population (births minus deaths), on the contrary, started to improve and was positive for the three months beginning July 2009 for the first time in the past decade. The natural increase has been less negative since due to more births and fewer deaths.

Cyclicality in the natural increase in population is created by both births and deaths, as in the winter births tend to decrease and the number of deaths to increase.

Emigration has been peaking in August for the last seven years; how-ever, there is not much cyclicality in net migration as immigration has tended to increase in summer as well.

After the sudden population decrease in 2011, due to the record-breaking registered emigration during 2010, this pace will slow for the next five years. It is projected that the size of population will decrease still more significantly in 2012 (by 1.1% per year to 3.209 m) due to higher-than-average emigration. The pace of decrease will then decelerate as the yearly population decline will be 0.4-0.5% thereafter. On average, the number of inhabitants will shrink by 19.5 thousands a year for the five years beginning 2011, reaching 3.147 million in 2016. The size of the population was decreasing per year on average by 0.3-0.6%, or by 17.6 thousands for the nine years from 2001 to 2010.

Population, natural change and net migration, thousands

2900

3000

3100

3200

3300

3400

3500

3600

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016-90

-80

-70

-60

-50

-40

-30

-20

-10

0

Population (ls)

Net migration (rs)

Births-deaths (rs)

Source: Statistics Lithuania, Swedbank

During the next five years, the age structure of the population will be changing as well. Due to higher fertility rates, the share of children (popu-lation aged 0-14 years) will start to increase steadily beginning in 2013, while the share of the population aged 15-24, which started to decline in 2009, will shrink even faster. This trend is caused by the exceptionally low birth rates since the reinstatement of independence in the 1990s. The share of the population aged 25-44, after decreasing from 2001 to 2010, will remain fairly stable from 2011 onwards. The share of the population aged 45-64 will keep increasing, albeit at a slower pace. The share of people aged over 64 will be increasing slower on average.

Pace of decrease in population will remain more rapid than long-term average – 19.5 thousands a year on average.


Therefore, the next five years will be different in terms of younger and older population dynamics. The number of people aged 15 and over were increasing in the past, however the trend was reversed in 2009. More-over, the population aged 15 and over will start to decrease faster than the whole population beginning in 2013. The working-age (15-64 years) population started to decrease already from 2004. As this decline was gaining speed, the size of the working-age population started to decrease faster than the overall population in 2011. This working-age group will keep declining faster than the population aged 15 years and over.

Population by age structure

19

.7%

19

.0%

18

.3%

17

.7%

17

.1%

16

.5%

15

.9%

15

.4%

15

.1%

15

.0%

15

.0%

15

.0%

15

.1%

15

.2%

15

.3%

15

.6%

15

.2%

15

.4%

15

.6%

15

.7%

15

.9%

15

.7%

15

.3%

29

.7%

29

.6%

29

.5%

29

.3%

28

.9%

28

.7%

28

.4%

28

.2%

28

.2%

28

.1%

27

.6%

27

.6%

27

.7%

27

.7%

27

.7%

27

.8%

22

.4%

22

.5%

22

.8%

23

.1%

23

.5%

24

.0%

24

.4%

24

.7%

25

.0%

25

.5%

26

.1%

26

.6%

26

.9%

27

.2%

27

.3%

27

.5%

13

.9%

14

.2%

14

.5%

14

.8%

15

.1%

15

.3%

15

.6%

15

.8%

16

.0%

16

.1%

16

.5%

16

.6%

16

.6%

16

.7%

16

.8%

17

.0%

14

.7%

12

.2%

12

.8%

13

.2%

13

.7%

14

.2%

14

.9%

14

.6%

14

.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

20012002 2003 20042005 2006 20072008 20092010 2011 20122013 2014 201520161500

1700

1900

2100

2300

2500

2700

2900

3100

3300

3500

>64

45-64

25-44

15-24

0–14

Labour force (rs)

Population (15-64) (rs)

Population (rs)


The proportion of the population aged 15-64 will decrease from 68.9% in 2010 to 67.5% in 2016; meanwhile, the population aged over 64 will ex-pand from 16.1% to 17%. The decreasing proportion of working-age peo-ple, together with the increasing share of elderly and children, poses a serious challenge to economic growth and the stability of the social secu-rity system.

Actual emigration in 2010 was lower than registered

Registered emigration skyrocketed in 2010 to 83.2 thousands; however, it is highly believable that emigration did not actually increase that sharply in 2010. For taxation reasons,1 many emigrants started declaring their emigration only in 2010 even though they may have left the country sometime earlier.

The emigration and immigration figures did not react to the worsening economic situation at the same time. Emigration started to increase sig-nificantly in April 2010, while immigration had already started to decrease at the beginning of 2009. Immigration then started to increase in October 2010, while emigration was still increasing quite significantly until April 2011, when it dropped by 57.2%.

In addition, the correlation between changes in emigration and immigra-tion has decreased. It became significantly weaker from January 2009 to March 2011 (-0.1, compared with -0.26 from January 2002 to December 2008). Emigration on average increased less than immigration decreased from January 2009 to March 2010. Afterwards, emigration started to in-crease very rapidly from April 2010. 1 As of January 2010, all unemployed people have to pay obligatory annual health insurance fees, which are 9% of the minimum monthly wage per month, or LTL 864 per year. This does not apply if a person has officially emigrated or has been registered as unemployed at the Lithuanian Labour Exchange.

The working-age population will be decreasing at an accelerating pace.

Registered emigration skyrocketed in 2010 to 83.2 thousands; however, actual emigration was much lower.


Even though the correlation until 2009 was weak (-0.26) it was statisti-cally significant at the 5% level and still may suggest that real emigration might have been quite different than what was registered. Actually emi-gration was probably higher until 2010 and lower afterwards.

International migration (2008-2011)

-100%

-50%

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

500%

550%

600%

2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010 2011 2011

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

14,000

Emigration, y oy

Immigration, y oy

Emigrants, thous. (rs)

Immigrants, thous. (rs)


The extent of overestimation may be approximated by using the latest labour force data, as the labour force should be decreasing as much as the number of people aged 15 and above if the labour force activity rate is not changing much.

Therefore, if the emigration statistics are accurate, the labour force, on the condition that its activity rate remained the same, would have de-creased by 2.6% at the beginning of 2011. However, data for the first quarter of 2011 suggest that this was not a case – the labour force de-creased by only 1% to 1.618 million in 2010.

Given that emigration was underestimated earlier, the number of people was overestimated as well; therefore, the labour force activity rate must have been lower than what was recorded. The labour force data suggest that the rate increased to about 58.7% at the beginning of 2011 from its 10-year average of 57.2%.

The first-quarter labour force data suggest that the official statistics over-estimated emigration in 2010 by approximately 2.5 times. If this is correct, the size of the population aged 15 and over would have decreased as much as the labour force in the first quarter of 2011 (given the same la-bour force activity rate as in 2010).

However, this would be an accurate estimate only if emigrants were as active in the labour force as the rest of population. If, however, the major-ity of emigrants were not previously members of the labour force, then emigration would have increased the participation rate.

On the other hand, the emigration increase in 2010 was disproportionate compared with the other two Baltic countries as well. Emigration rates have been higher in Lithuania since 2004, except for 2006, when emigra-tion rates jumped in Estonia. However, in 2010, the spread between Lithuania's emigration rate and the other Baltic countries' skyrocketed to 2 percentage points (the widest spread recorded during 2004-2009 had been 0.35 percentage point). This seems unjustified as there were no extremely exceptional circumstances for such a sharp increase in Lithua-nia (the economic slump was even milder there).

Registered emigration increased more than labour force data suggest it had to and much more than in Latvia or Estonia.


Emigration rates increased in 2010 in Latvia and Estonia as well, al-though by a much smaller amount than in Lithuania – from 0.33% to 0.48% in Latvia and from 0.35% to 0.4% in Estonia. In Lithuania, mean-while, the emigration rate in 2010 soared to 2.5% from 0.66% in 2009. If the emigration rate had increased by the same amount as in Latvia and Estonia on average, emigration would have been almost three times lower than registered in 2010. Therefore, it is projected that emigrationrates will come down to their long-term average in the future.

Immigration was growing from 2003 until 2008, almost doubling in that period to 9.3 thousands; however, immigration fell to 6.5 thousands (by 30.2%) in 2009 and almost reached its 2002 level after falling by a further 19.6% to 5.2 thousands in 2010.

Emigration increased by 2.3 times from 2002 (6.8 thousands) to 2005 (15.6 thousands).Then, after falling by 19.1% to 12.6 thousands in 2006, it started to grow again, reaching 22 thousands in 2009. Registered emi-gration skyrocketed in 2010 to 83.2 thousands.

It is projected that the emigration rate2 will decrease from the second half of 2011 to its long-term average, meaning that emigration will be de-creasing a little bit more (about 0.9% a year) than the total size of the population in 2013-2016. Immigration is projected to follow a long-term growth trend beginning in the second half of 2011; it will be growing by 3.4-3.7% a year in 2013-2016. Immigration should be increasing in line with the improving economic situation, decreasing unemployment rate, and shrinking labour force. A bounce back in immigration was already registered in the first half of this year3.

International migration (2001-2016)

0

10

20

30

40

50

60

70

80

90

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160

2

4

6

8

10

12

Emigration (ls)

Immigration (rs)


Labour force will be shrinking and aging faster

As the increase of the population aged 15 and over was decelerating, the dynamics of the labour force in the past was mainly determined by the labour force activity rate4, which was falling until 2006 and increasing af-terwards. The labour force shrank by 2.9% from 2001 to 2006; it reached its lowest value, of 1.588 million then as the activity rate decreased from 2 Emigration rates are calculated and projected separately for different age groups and genders.3 Actual registered emigration and immigration statistics are used for the first half of 2011.4 Labour force (the sum of employed and unemployed) over population aged 15 and over.


58.4% to 55.9%. However, along with increasing activity, the size of the labour force bounced back thereafter, reaching 1.635 million, almost its 2001 level, in 2010.

The size of the labour force peaked at 1.642 million in 2003 and again at 1.641 million in 2009. The labour force is projected to decrease, in line with the decreasing population aged 15 and over from 2012 to 2016; however, the activity rate will be higher by 0.9 percentage point.

The number of people aged 15-64 decreased by 0.9% from 2001 to 2010 and will continue to decline more rapidly for the next five years, reaching 2.123 million in 2016 - some 7.5% lower than in 2010 and 4.4% lower than in 2011. It is projected that the pace of decrease will be more rapid than the pace of the population decline, as the proportion of chil-dren and elderly will increase.

For several reasons, the labour force will contract slower than the number of people aged 15-64 years. First, the proportion of people over 64 years, who will participate in the labour force as well, will increase. This is partly due to the gradually increasing retirement age, but also due to the greaterpersonal motivation to stay in the labour force. Second, the latest labour force data suggest that the actual labour force activity rate has increased lately, probably due to the emigration of previously economically inactive people. The labour force decreased much less than the working-age population; this was caused by the higher-than-actual registered emigra-tion. As this suggests that emigration was not registered and accounted for earlier, the actual labour force activity rate was underestimated. This trend is likely to continue, and the higher activity rate will become perma-nent, especially if social benefits for unemployed become less generous in comparison to salaries.

The increasing retirement age should support the growth of the activity rate as well. The retirement age will start to increase again, beginning in 2012, by four months a year for females and by two months a year for males until 2026, when it will reach 65 years. Currently, the retirement age is 62 years and six months for males, and 60 years for females.

The labour force will decrease by 1.0% in 2011, 1.1% in 2012, and 0.6-0.7% a year thereafter, coming down to 1.560 million in 2016.

However, the decrease would be higher if the activity rate were falling from 2011 to 2016. A labour force of only 1.513 million would be left in 2016 if the activity rate were to decrease by 0.35 percentage point (the average decrease from 2001 to 2007) every year.

Labour force will be shrinking faster than population.


Labour force, population (15-64), activity rate (15 years and above)

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 201650.0%

51.0%

52.0%

53.0%

54.0%

55.0%

56.0%

57.0%

58.0%

59.0%

60.0%

61.0%

Labourforce, %change (ls)

Population15-64, %change (ls)

Labourforceactivity rate,% (rs)


Even though the number of children will start to increase in 2014 due to higher fertility rates, the size of the population aged 15 and over will still be shrinking. Fewer and fewer people will be entering the working-age group due to the decrease in fertility and birth rates from the 1990s to 2003. The group of people aged 15-24 will be decreasing the fastest. The age groups from 35 to 49 will decrease by more than 10% from 2010 to 2016 as well. In some groups, however, the number of people will be in-creasing. For example, the number of those aged 55-59 and 85 and over will increase by more than 10% during 2010-2016.

Therefore, the labour force will not just decrease but probably also be-come older as the increase in the mean ages of the population aged 15-64 years and over 14 years gathers pace. The mean age will reach 39.6 years (population aged 15-64 years) and 46.8 years (15 years and over) in 2016, which is, respectively, 1.4 and 1.7 years more than in 2010. In comparison, from 2001 until 2010, the mean age in the same age groups increased by only 0.3 and 1 year, respectively.

The mean age of the overall population will jump in 2011 due to the his-toric increase in registered emigration, which reduced the size of the group of average-aged people the most. The share of emigrants in this group, aged 20-49, amounted to 61-77% of all emigrants during 2001-2010.

Beginning in 2012, the pace of increase in the mean age of the popula-tion will slow compared with 2001-2010 and will be slower than the in-crease in the mean age of working-age people. This tendency reverses that of the past decade, when the mean age of the working-age popula-tion was more or less stable and the overall population was growing old faster. The difference between the age of the males and females was increasing linearly, except for 2011, and is projected to expand from 4.6 years in 2001 to 5.5 years in 2016.

The group of people aged 15-24 will be decreasing the fastest and labour force will age faster than the population.


Mean age by gender and age group, years

34

36

38

40

42

44

46

48

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Males

Females

Population

Population(15-64)

Population(15 and over)


The labour force will become not only older and more experienced, there-fore, but probably also more educated in coming years. The percentage of people with higher university and nonuniversity education is projected to increase, while the number of people who have only primary or lower secondary education should decrease, based on the historical trend.However, the number of graduates from higher university and nonuniver-sity studies as a percent of the population aged 15 and over should de-crease in 2013-2014 because enrolment in these studies decreased dur-ing the last two years.

A more experienced and educated labour force is good news for Lithua-nia’s potential growth. As growth will be negatively affected by the size of the labour force, which is bound to decrease at an accelerating pace, more attention should be paid to productivity growth. It is likely that a more experienced and educated workforce will be able to become more productive and somewhat counteract the negative effect of the dwindling number of working people.

Even though it would be hard to estimate the effect of the size and age structure of the labour force on Lithuania's economic growth due to the short span of the time series, different studies made in Europe suggest that the correlation between the change in age structure and economic growth is significant and robust. Economic growth decreases with a de-creasing proportion of the workforce, not only in terms of output per per-son but also in terms of output per worker. This may happen because ofmore time spent on household chores as dependency ratios increase, or because of a demand shift towards services, which have slower produc-tivity growth and lower saving rates. One of the European studies also found a “significant jump shaped pattern for the workforce age structure on economic growth.“ It is argued that “it is straightforward to include demographic forecasts when projecting economic growth rates“ as it is „an important and robust determinant (with respect to the inclusion of various economic variables) of past economic growth rates.” 5

This study, which was conducted in the EU-15, did not identify the chan-nel through which demographics may affect the economy or the causality, which may be bidirectional. However, some empirical results from this study show that age structure is related to the ability to absorb technol-ogy, as youngsters tend to drive the technology absorption process.

5 See Vienna Institute of Demography and Institute for Futures Studies (2007).The Relationship Between Demographic Change and Economic Growth in the EU. Research Report No. 32.

Labour force should become more educated and experienced.

Economic growth may decrease with decreasing proportion of working force, not only in term of output per person but also in term of output per worker.


There also may exist other channels - such as different saving and in-vestment behaviour and human capital formation.5

However, other studies suggest that the relationship between age and productivity depends on occupation, and that it is important to understand that past trends may change along with a changing environment. Current demographic developments might have a positive effect on productivity. Even though the labour force may become less flexible in terms of mobil-ity and adopting new methods, the increasing life span suggests that be-ing 60 years' old now is not the same as it was a few decades ago. Fur-thermore, now and increasingly in the future, older people are being and will continue to be encouraged to become more flexible and innovative, as there may be fewer youngsters to fill this gap. An increasing aware-ness of the pressures under which social security systems are bound to come should encourage older people to try harder to satisfy the needs of the labour market or at least to become more active in the labour force. This is already apparent in Lithuania, as its older-age (55-64) activity rate has been increasing recently. There are not many alternatives for those who seek to ensure their welfare at an older age.

Moreover, the rising growth rate of the workforce is creating capital dilu-tion and may reduce productivity due to a lowering of the ratio of capital to the labour force. Therefore, the decreasing size of the labour force and the greater pressure to increase wages should strengthen the stimulus to invest in more efficient technology and decrease the reliance on the scarce labour.

Nevertheless, increasing productivity may result in higher wages, espe-cially in the public sector. If wage growth exceeds productivity growth, it may decrease cost competitiveness of a country. The “East Asian miracle” is another example of the importance of demog-raphy for growth. The extraordinary performance of a group of East Asian economies, which demonstrated high and sustained growth for a very long period of time, is thought to be strongly associated with an increas-ing proportion of working-age people as well. Studies have shown that favourable demographic conditions could be responsible for about 2 per-centage points of the income growth in East Asia, or about one- third of the “miracle”6.

The much less favourable demographic conditions in Lithuania, even though they may have positive as well as negative effects on productivity, suggest that we will have to find new ways to sustain economic growth and the social security system, which is bound to come under even big-ger pressure due to the aging population. For such a country as Lithua-nia, whose Social Security Fund is projected to have by end-2011 a cu-mulative debt of LTL 8 billion7, or about 70% of this year's planned in-come, it is particularly important to find new ways to tackle such demo-graphic challenges.

Government therefore should encourage investments in increasing effi-ciency and promote active aging. Government could consider ensuring that the later a person retires, the greater are the social benefits for him. The employers and older employees might be encouraged to take part in EU active aging programs, which supports training.

6 See Bloom, D. E. (2011). Population Dynamics in India and Implications for Economic Growth. Harvard School of Public Health. Program on the Global Demography of Aging. Working Paper No. 65. 7 According to mid-September 2011 projection.

Older people are being and will continue to be encouraged to become more innovative and active .


There is room to increase labour force activity rate

The labour force activity rate during the last 10 years increased signifi-cantly only in the age group of 55-64 years. This was mostly influenced by the raising of the retirement age, although the activity rate of people aged 60-64 kept increasing after 2006 – when the pension age stopped rising - as well.

The activity rate of the population aged 55-59 years has exceeded the activity rate of the entire working-age (15-64 years) population since 2003 by up to 5.5 percentage points. The difference between the participation rate of the working-age population and that of people aged 60-64 de-creased from 44.5 percentage points to 34 percentage points from 2001 to 2010.

The activity rate was decreasing the most among the youngest (15-24 years) people. Even though their activity rate was picking up from 2006 to 2008, it still remained lower than the average for 2001-2003

Labour force activity rate by different age group, %

0

10

20

30

40

50

60

70

80

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

15–64

55–59

60–64

15-24

Source: Statistics Lithuania

The activity rate among 15-24-year old in Lithuania is much lower than in the EU, as well as in Latvia and Estonia; this is because, over the last 10 years, the rate decreased in Lithuania while it increased in the other two Baltic countries. The fact that students in Lithuania enter the labour mar-ket less actively than in the other countries may indicate that it may be harder for them to work during their studies; this problem may be due to a lack of flexibility in the labour market that prevents young people from successfully complementing their studies with practice. The participation rate of older people (55-64 years) is higher in all three Baltic countries than the EU average. However, in Lithuania the rate was still lower than in Latvia and Estonia from 2005 to 2010.

The activity rate of Lithuania’s working-age (15-64 years) population in 2010 was only 0.5 percentage point lower than the EU average; however, it was 2.7 and 3.3 percentage points lower than Latvia's and Estonia's, respectively. Lithuania might have lower activity rate due to more gener-ous social security system than in Latvia or Estonia. Even though unem-ployment trap in Lithuania decreased from 86% (in 2009) to 70% (in 2010), it was still lower than in Estonia (63%).

The difference between activity rates for males and females (15-64 years) in Lithuania decreased by 4.1 percentage points over the past 10

Activity rates increased most among those aged 55-64 and decreased among those aged 15-24.

Activity rates in Lithuania lag behind the EU or Latvia and Estonia.


years. Males were only 3.6 percentage points more active than females -their activity rate was 72.4%, compared with 68.8% among females in 2010. The gender-activity gap decreased most during 2009 and 2010, allowing Lithuania to become the leader in the EU in this demographic parameter, as the average gender-activity gap in the EU in 2010 was 13.2 percentage points.

However, this is not entirely a positive trend, as it came at the expense of a male activity rate that was lower than the EU average, as well as Latvia's and Estonia's. The female activity rate had historically been higher than the EU average; however, in 2004-2005, it was growing slower than in the EU, Latvia and Estonia and became lower than in these two Baltic countries. In a nutshell, over the past 10 years, the fe-male activity rate was not increasing as much as other countries' and the male activity rate was even decreasing.

The female activity rate and the fertility rate did not move in opposite di-rections, except for 2005-2006 and 2010. Both may have been influenced by many other factors, such as the overall economic situation and fertility policy. However, it still seems reasonable that the historically higher fe-male activity rate might have been associated with lower fertility rates on average. The higher female activity rate may have been a factor in the increasing average age of women at childbirth, as working females tend to postpone their motherhood. A higher average age of women at child-birth depresses the current birth rate8, and a higher age of first-time mothers may lower the total number of children in a family as well.

Working-age (15-64) population activity rate by gender in Lithuania and the EU, %

60

65

70

75

80

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

EU (males)

Lithuania (males)

Lithuania (females)

EU (females)

Source: Eurostat

Female unemployment in the EU was higher than male unemployment from 2001 to 2009. However, Lithuania did not differ much from the other two Baltic countries in terms of the gender unemployment gap. On aver-age in Lithuania, male unemployment was higher than female by a similar amount as in Latvia and Estonia, if 2004 and 2005, when female unem-ployment was higher than male unemployment in Lithuania, is excluded. The only difference is that the gender unemployment gap tended to ex-pand more during high unemployment periods (2001, 2009, and 2010) in Lithuania. The gap tends to widen more during times of adverse eco-nomic conditions, as there are more males employed in sectors, such as construction, that are particularly vulnerable to economic downturns.

8 More about the effect of increasing average age of women at childbirth on birth rates in 6th section .


However, male participation did not decrease when the gender unem-ployment gap was the widest. Male participation was decreasing most significantly in 2004-2006, when there was a rapid decrease in total un-employment.

Finally, even if activity rates were underestimated only in Lithuania over the last few years, the gap between Lithuania’s activity rate and those in the other two Baltic countries, as well as the EU, suggests that there is still room for improvement.

The activity rate among the youngsters (15-24 years) in Lithuania lags behind that in the EU, and even though older people (55-64 years) are more active than in the EU, this activity rate still lags Latvia's and Esto-nia's. Just because Lithuania's overall activity rate is similar to the EUaverage is not enough to think that Lithuania's position will remain good: all European countries are facing similar demographic challenges and are not likely to not respond to them.

More incentives to look for a job could be created, first, by increasing the difference between the minimum wage and social benefits. A more com-plicated and probably too costly--though effective--way would be to en-sure that benefits comes to those who really need them and not to those who do not want to work at all. Looked at from a different angle, a sharper focus on developing self-motivation through different methods of education should lower the number of people who do not want to work. Therefore, education, whose main goal should be to induce interest in a subject rather than to force students to memorise facts, should help as well.

Higher age dependency, but lighter burden for the employed

The age-dependency ratio was falling during 2001-2010; however, this was caused by a decrease in the number of children compared with the population aged 15-64, as well as by an increase in the proportion of the elderly during that period.

The decreasing size of the working-age (15-64 years) population will cause the age-dependency ratio to rise. This will reach the 2003-2004 level in 2016, as there will be 48.3 children and elderly people for every 100 people of working age. This ratio will be growing because the propor-tion of children will increase beginning in 2011 and the proportion of the elderly will continue to increase.

The dependency-on-employed ratio, which shows the number of children, elderly people, and unemployed per 100 employed, was influenced mostly by the significant fluctuation in unemployment, as this ratio de-creased from 17.4% in 2001 to 5.6% in 2006 before bouncing back to 17.8% in 2010. The ratio‘s decline and increase was even steeper due to the decreasing proportion of children until 2009 and the increased propor-tion of elderly in 2008-2010 due to high emigration.

The dependency-on-employed ratio will be decreasing during the next four years, mainly because employment will rise. However, the pace of this decrease will slow in 2015 and 2016, as employment growth will ebb. Even if unemployment were to fall a bit more in 2016 and reach the 2008 level, there would still be 0.7 more dependent on the employed in 2016 than in 2008. This is due to the increased number of the elderly, together with the smaller size of the labour force.

Age-dependency ratio and dependency on employed will be moving in opposite directions until 2016.


Age-dependency ratio9, dependency on employed ratio10, %

0

5

10

15

20

25

30

35

40

45

50

55

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160

10

20

30

40

50

60

70

80

90

100

110

Children (ls)

The elderly (ls)

The elderly/Employed

Išlaikomų žmonių irbedarbių koeficientas*

Children/Employed

Bendrasis išlaikomųžmonių koeficientas**


Total fertility rate - increasing and underestimated

It is projected that the exponential growth of the total fertility rate (TFR), as well as the increase in the number of births recorded from 2006 to 2008, will slow. However, the TFR should still grow by about 2% yearly, rising from 1.5 to 1.7 during 2010- 2016.

The increase in the number of births will decelerate due to a decrease in the number of women of reproductive age (15-49 years). The number of potential mothers will be decreasing faster than the overall population and the population aged 15-64 for the next five years. The increase in the number of births is supported by the increasing age of mothers, as the number of the youngest women (aged 15-24) will be shrinking much more than the number of older females.

Even though a projected annual increase in the TFR of about 2% may look overly optimistic in light of the increasing uncertainty, the possible underestimation of the TFR in earlier years should be taken into account as well. The latest data on the labour force suggest that actual emigration was lower in 2010 than registered emigration, meaning that all those reg-istered must have left the country sometime earlier. This, in turn, would lower the actual number of women in previous years. Moreover, this sup-position is supported by the latest census results, which show a much smaller number of inhabitants than previously thought.

Still the TFR, which is projected to reach 1.7 in 2016 (1.5 in 2010), will remain below a sustainable level, as the average woman during her re-productive period of life will give birth to fewer than 2 children. Unless the TFR is about 2.1 (the replacement rate in industrialised countries) women will not give birth enough to replace themselves and their partners. How-ever, such high rates have not been recorded for the last 20 or 25 years.

9 Children (aged 0–14) and elderly people (>64) per 100 population aged 15–64, as of January 1.10 Children (aged 0–14), elderly people (>64) and unemployed per 100 employed as of January 1.

TFR is projected to increase to 1.7, though the measure is likely to be underestimated due to increasing age of mothers.


Total fertility rate, number of births

29000

31000

33000

35000

37000

39000

41000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160

0.15

0.3

0.45

0.6

0.75

0.9

1.05

1.2

1.35

1.5

1.65

1.8

Nb. of births

Total fertility rate (rs)


On the other hand, the TFR must have been underestimated due to the increase in the childbearing age as well; this is because it has been ris-ing rapidly for the last 10 years and should be increasing further, as it is still below the EU average.

When the mean age of giving birth is increasing, the number of births given by younger women decreases, putting downward pressure on the TFR. However, this movement is misleading: a woman may have the same number of children during her life, but, as children are born in later years, the number of births decreases only during this period.11

This effect of a rise in the childbearing age on the TFR is called the “tempo effect.” For example, in 2006, the tempo-adjusted TFR in Lithua-nia was 0.44 higher than the unadjusted.12 This means that actually at that time women should have had 1.75 children throughout their lives, even though the unadjusted TFR was equal only to 1.31.

Eventually, as the postponement of childbearing ceases, the tempo effect disappears as well; however, the mean age of mothers in Lithuania should be still increasing for the next five years. In 2008, the difference between the mean age of women at childbirth in Lithuania and the EU was 1.5 years; this will decrease to 0.7 in 2016 if the trend growth in both time series continues.

11 See Philipov, D., Sobotka, T. (2006). Estimating tempo effect and adjusted TFR. Vienna Institute of Demography. Austrian Academy of Sciences. 12 See European Commission working document “Demography report 2010 -Older, more numerous and diverse Europeans.”


Mean age of women at childbirth

24

25

26

27

28

29

30

31

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Lithuania

EU

Source: Statistics Lithuania, Eurostat, Swedbank

It is likely that the fertility rate will become a more important factor for the size of the population change, as emigration, which in 2010 was likely much lower than the official statistics, is to slow down, and there are no signs of a change in immigration policy.

Sustainable economic growth depends on timely demographic pol-icy action

Lithuania faces such demographic challenges as an aging population, low birth rates, high emigration, and sluggish immigration. These devel-opments decrease the share of the labour force in the overall population and threaten the social security system, as well as economic growth.

Even though the TFR is probably underestimated, it is still important to ensure that birth rates do not decrease in the long term. The population would not have decreased as much and the labour force would not have aged as fast if fertility rates had been higher in the past.

Emigration must have been the main cause of the shrinking population in recent years. It has significantly decreased the number of people and contributed to the aging of the population. The low historical fertility rates and emigration have also caused the labour force to shrink faster than the total population and to speed up its aging.

However, emigration is a natural process experienced by all the countries that have joined the EU and opened their borders. This process becomes less important when the economy is growing while remigration some-times can foster economic growth. A government is rarely able to alteremigration patterns, as these are primary influenced by higher wages abroad.

The government has raised the low fertility rate in Lithuania during the last few years by providing very favourable conditions for maternity leave. However, the resulting financial burden has been too heavy for the Social Security Fund, whose deficit has increased significantly. Furthermore, the two-year maternity leave has had a negative impact on the labour market and, possibly, the professional competencies of the mothers. Even though the fertility rate has increased, Lithuania can not afford such a policy. Nevertheless, a rising fertility rate is important for the future. Therefore, the government should plan to invest in increasing the capac-ity of kindergartens, as today it is hard for parents to find one, even if a child is registered just after birth. The fertility rate is dependent on the overall condition of the economy, and, therefore, a successful policy for

Fertility rate may become more important factor for the size of population change.

Demographic change decreases the size of labour force and threatens social security system.


sustaining economic growth would itself positively influence the fertility rate.

The rising proportion of the elderly and children, on the one side, and the decreasing size of the labour force, even though it may become more experienced and educated, on the other, may threaten the sustainability of public finances, as incomes may increase less than expenditures and reduce potential growth.

Therefore, the efforts of policymakers should be targeted at increasing participation rates, easing immigration policy, and sustaining higher fertil-ity rates, as well as ensuring the soundness of public finances and sus-tainable growth.

The size of the labour force may be increased by prolonging the period of involvement. The most obvious way to implement this is to raise the pen-sion age, as this appeared to be effective in increasing the participation among those aged 55-64 in the past. Meanwhile, the decreasing activity rate among the youngest people (20-24 years) might be increased by reducing the time needed to acquire an education. Lithuania could follow the example of advanced countries, whereby students could finish their studies in shorter periods of time at the expense of the long Lithuanian summer holidays.

As the participation rates of both the above-mentioned demographic groups lag behind those of the EU--or, at least, behind Latvia's and Esto-nia's-- it could be useful to review the termination date of the new tax ex-emption for the youngest in the work force. As an attempt to increase employment among the youngest, beginning in August 2010, the social security tax was lowered from 31% to 7.7-8.4% for employers hiring a person who had never worked before. This exemption is temporary and will expire in July 2012. However, this could be too short a period of time to lower the youth unemployment rate from its high in 2010 (35.1%), as well as too short to possibly increase the youth participation rate.

The experience of the EU and the other two Baltic countries suggests that there should be much room to increase the male activity rate. More-over, Lithuania was falling behind Estonia and Latvia in terms of the fe-male participation rate. Participation rates can perhaps also be raised by developing self-motivation through establishment of different methods of education and a greater difference between the minimum wage and so-cial benefits, as well as better control.

Raising participation rates would lower the number of older people inpoverty, increase economic growth, and ease the burden for the social security system as the proportion of pensioners rises.

Finally, Lithuania should be preparing to review its immigration policy. As the demographic situation in Lithuania becomes more similar to the EU's, there is more stimulus for Lithuania to start achieving the goals declared by the EU. These are to “tap the potential of the two fastest growing segments in the population: older people and immigrants,“ and to in-crease productivity, as all this is crucial for economic growth and greater social cohesion.13 The fact that Lithuania faces demographic challenges similar to the most advanced countries means that most of these coun- 13 See European Commission working document. Demography report 2010 -Older, more numerous and diverse Europeans.

Efforts should be targeted at increasing participation rates, easing emigration policy, and sustaining higher fertility rates and soundness of public finances.


tries will be trying to attract immigrants. Therefore, timely and proper ac-tions will determine which countries with dwindling populations will be successful in attracting workers.

The emigration policy is dependent on EU regulations. Nevertheless, it takes at least three months to hire a foreigner outside the EU, as an em-ployer is not allowed to apply for registration if he had not registered a vacancy in the Lithuanian Labour Exchange a month before. A foreigner also has to have at least two years of working experience in a particular field during the past three years. A foreigner cannot work longer than two years as well. Therefore, the option of hiring a foreigner is time-consuming and expensive, even if no suitable person can be found within the country. Current developments require a more liberal and active pol-icy towards immigration.

Lithuania’s wage level has been attractive to Belarusians, Ukrainians, and Russians, whose immigration to Lithuania increased during 2005-2008 and could rise again, in conjunction with a better economic outlook and a more favourable immigration policy.

It seems that the current policy actions may not be enough to counteract the demographic challenges to growth and social welfare. However, eco-nomic growth and demographics are interrelated. Neither an increased pension age, nor higher activity rates or more friendly immigration policy will help unless there is sustainable economic growth and an increase in recruitment of native population and foreigners. Otherwise, only the num-ber of unemployed would increase, making the social security system even more fragile, and the worsening economic conditions would lower the fertility rate. At the same time, a successful implementation of demo-graphic policies would work to prevent the decrease of the potential eco-nomic growth.

All in all, demographic change threatens the social security system and sustainable economic growth. Without appropriate demographic policy at an early stage, any later actions would become less and less effective due to the worsening economic situation induced by these demographic developments.

Nerijus MačiulisVaiva Šečkutė

Sustainable economic growth and increase in recruitment of native and foreign population are the best cures.


AbbreviationsEU – European Union (27 countries)

EU-15 – European Union of 15 member states

TFR – Total fertility rate

References Bloom, D. E. (2011). Population Dynamics in India and Implications for Economic Growth. Harvard School of Public Health. Program on the Global Demography of Aging. Working Paper No. 65

European Commission working document. Demography report 2010 - Older, more numerous and diverse Europeans.

Philipov, D., Sobotka, T. (2006). Estimating tempo effect and adjusted TFR. Vienna Institute of Demography. Austrian Academy of Sciences.

Vienna Institute of Demography and Institute for Futures Studies (2007). The Relationship Between Demographic Change and Economic Growth in the EU Research Report No. 32.


Economic Research Department

SwedenCecilia Hermansson +46 8 5859 7720 [email protected] Chief EconomistChief Economist, Sweden

Magnus Alvesson +46 8 5859 3341 [email protected] Economist

Jörgen Kennemar +46 8 5859 7730 [email protected] Economist

Anna Ibegbulem +46 8 5859 7740 [email protected]

EstoniaAnnika Paabut +372 888 5440 [email protected] Chief Economist

Elina Allikalt +372 888 1989 [email protected] Economist

LatviaMārtiņš Kazāks +371 67 445 859 [email protected] Group Chief EconomistChief Economist, Latvia

Dainis Stikuts +371 67 445 844 [email protected] Economist

Lija Strašuna +371 67 445 875 [email protected] Economist

LithuaniaNerijus Mačiulis +370 5 258 2237 [email protected] Economist, Lithuania

Lina Vrubliauskienė +370 5 258 2275 [email protected] Economist

Vaiva Šečkutė +370 5 258 2156 [email protected] Economist


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Swedbank Baltic Sea Analysis No. 29

Economy & Finance

Transcript of Swedbank Baltic Sea Analysis No. 29