Swedbank Baltic Sea Analysis No. 29

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Swedbank Baltic Sea Analysis No. 29: Unfavourable demographic changes in Lithuania require more active policy response

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Swedbank Baltic Sea Analysis No. 29

  1. 1. Swedbank Baltic Sea Analysis No. 29  27 October, 2011Unfavourable demographic changes in Lithuaniarequire 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 structureFor the past ten years the size of the population was mostly influenced by The size of populationthe small number of births, as the negative difference between the num- was decreasing due tober of people who died and were born was higher than net migration negative natural growthmost of the time till March 2009. After that date, the number of births till 2009, whenstarted to increase more than deaths and emigration began increasing emigration took over.and immigration decreasing. May 2010 was a turning point, as the popu-lation, which had been decreasing by a few basis points every month, Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000 E-mail: ek.sekr@swedbank.com 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
  2. 2. started to decrease by tens of basis points. The decrease became milderfrom December 2010 onwards, reaching 13-17 basis points every month.Registered emigration skyrocketed in April 2010, as it suddenly increasedfrom 2.1 thousands to 11.3 thousands per month – this extraordinary in-crease in registered emigration lasted until December 2010, although stillremaining 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 July2009 for the first time in the past decade. The natural increase has beenless negative since due to more births and fewer deaths.Cyclicality in the natural increase in population is created by both birthsand deaths, as in the winter births tend to decrease and the number ofdeaths 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 hastended to increase in summer as well.After the sudden population decrease in 2011, due to the record-breakingregistered emigration during 2010, this pace will slow for the next five Pace of decrease inyears. It is projected that the size of population will decrease still more population will remainsignificantly in 2012 (by 1.1% per year to 3.209 m) due to higher-than- more rapid than long-average emigration. The pace of decrease will then decelerate as the term average – 19.5yearly population decline will be 0.4-0.5% thereafter. On average, the thousands a year onnumber of inhabitants will shrink by 19.5 thousands a year for the five average.years beginning 2011, reaching 3.147 million in 2016. The size of thepopulation was decreasing per year on average by 0.3-0.6%, or by 17.6thousands for the nine years from 2001 to 2010. Population, natural change and net migration, thousands3600 03500 -10 -203400 -303300 -40 Population (ls) Net migration (rs)3200 -50 Births-deaths (rs) -603100 -703000 -802900 -90 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Statistics Lithuania, SwedbankDuring the next five years, the age structure of the population will bechanging 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 in2009, will shrink even faster. This trend is caused by the exceptionallylow birth rates since the reinstatement of independence in the 1990s. Theshare of the population aged 25-44, after decreasing from 2001 to 2010,will remain fairly stable from 2011 onwards. The share of the populationaged 45-64 will keep increasing, albeit at a slower pace. The share ofpeople aged over 64 will be increasing slower on average.2 Swedbank Baltic Sea Analysis No. 29 • 27 October, 2011
  3. 3. Therefore, the next five years will be different in terms of younger and The working-ageolder population dynamics. The number of people aged 15 and over were population will beincreasing in the past, however the trend was reversed in 2009. More- decreasing at anover, the population aged 15 and over will start to decrease faster than accelerating pace.the whole population beginning in 2013. The working-age (15-64 years)population started to decrease already from 2004. As this decline wasgaining speed, the size of the working-age population started to decreasefaster than the overall population in 2011. This working-age group willkeep declining faster than the population aged 15 years and over. Population by age structure 100% 3500 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% 90% 3300 >64 80% 3100 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% 45-64 70% 2900 60% 2700 25-44 29.7% 29.6% 29.5% 29.3% 28.9% 28.7% 50% 2500 28.4% 15-24 28.2% 28.2% 28.1% 27.6% 27.6% 27.7% 27.7% 27.7% 27.8% 40% 2300 0–14 14.3% 30% 2100 19.0% 14.6% 18.3% 14.9% 17.7% 15.2% 17.1% 15.4% 16.5% 15.6% 15.9% 15.7% 15.4% 15.9% 15.1% 15.7% 15.1% 13.7% 15.2% 13.2% 15.6% 12.2% Labour force (rs) 15.0% 14.2% 15.3% 12.8% 15.0% 15.3% 15.0% 14.7% 20% 1900 Population (15-64) (rs) 19.7% 10% 1700 Population (rs) 0% 1500 20012002 2003 20042005 2006 20072008 20092010 2011 20122013 2014 20152016 Source: Statistics Lithuania, SwedbankThe proportion of the population aged 15-64 will decrease from 68.9% in2010 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 aserious challenge to economic growth and the stability of the social secu-rity system.Actual emigration in 2010 was lower than registeredRegistered emigration skyrocketed in 2010 to 83.2 thousands; however, it Registered emigrationis highly believable that emigration did not actually increase that sharply skyrocketed in 2010 toin 2010. For taxation reasons, 1 many emigrants started declaring their 83.2 thousands; however,emigration only in 2010 even though they may have left the country actual emigration wassometime earlier. much lower.The emigration and immigration figures did not react to the worseningeconomic situation at the same time. Emigration started to increase sig-nificantly in April 2010, while immigration had already started to decreaseat the beginning of 2009. Immigration then started to increase in October2010, while emigration was still increasing quite significantly until April2011, 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 toMarch 2011 (-0.1, compared with -0.26 from January 2002 to December2008). Emigration on average increased less than immigration decreasedfrom 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 annualhealth 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 orhas been registered as unemployed at the Lithuanian Labour Exchange.3 Swedbank Baltic Sea Analysis No. 29 • 27 October, 2011
  4. 4. 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 emigrationmight have been quite different than what was registered. Actually emi-gration was probably higher until 2010 and lower afterwards. International migration (2008-2011) 600% 14,000 550% 13,000 500% 12,000 450% 11,000 400% 10,000 Emigration, y oy 350% 9,000 Immigration, y oy 300% 8,000 250% 7,000 Emigrants, thous. (rs) 200% 6,000 Immigrants, thous. (rs) 150% 5,000 100% 4,000 50% 3,000 0% 2,000 -50% 1,000-100% 0 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010 2011 2011 Source: Statistics Lithuania, SwedbankThe extent of overestimation may be approximated by using the latest Registered emigrationlabour force data, as the labour force should be decreasing as much as increased more thanthe number of people aged 15 and above if the labour force activity rate labour force data suggestis not changing much. it had to and much more than in Latvia orTherefore, if the emigration statistics are accurate, the labour force, on Estonia.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 firstquarter 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 peoplewas overestimated as well; therefore, the labour force activity rate musthave been lower than what was recorded. The labour force data suggestthat the rate increased to about 58.7% at the beginning of 2011 from its10-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 asmuch 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 asactive in the labour force as the rest of population. If, however, the major-ity of emigrants were not previously members of the labour force, thenemigration would have increased the participation rate.On the other hand, the emigration increase in 2010 was disproportionatecompared with the other two Baltic countries as well. Emigration rateshave been higher in Lithuania since 2004, except for 2006, when emigra-tion rates jumped in Estonia. However, in 2010, the spread betweenLithuanias emigration rate and the other Baltic countries skyrocketed to2 percentage points (the widest spread recorded during 2004-2009 hadbeen 0.35 percentage point). This seems unjustified as there were noextremely exceptional circumstances for such a sharp increase in Lithua-nia (the economic slump was even milder there).4 Swedbank Baltic Sea Analysis No. 29 • 27 October, 2011
  5. 5. Emigration rates increased in 2010 in Latvia and Estonia as well, al-though by a much smaller amount than in Lithuania – from 0.33% to0.48% 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. Ifthe emigration rate had increased by the same amount as in Latvia andEstonia on average, emigration would have been almost three timeslower 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 thatperiod to 9.3 thousands; however, immigration fell to 6.5 thousands (by30.2%) in 2009 and almost reached its 2002 level after falling by a further19.6% 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 halfof 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 thepopulation in 2013-2016. Immigration is projected to follow a long-termgrowth trend beginning in the second half of 2011; it will be growing by3.4-3.7% a year in 2013-2016. Immigration should be increasing in linewith the improving economic situation, decreasing unemployment rate,and shrinking labour force. A bounce back in immigration was alreadyregistered in the first half of this year3. International migration (2001-2016)90 1280 107060 850 6 Emigration (ls)40 Immigration (rs)30 420 210 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Statistics Lithuania, SwedbankLabour force will be shrinking and aging fasterAs the increase of the population aged 15 and over was decelerating, thedynamics of the labour force in the past was mainly determined by thelabour force activity rate4, which was falling until 2006 and increasing af-terwards. The labour force shrank by 2.9% from 2001 to 2006; it reachedits lowest value, of 1.588 million then as the activity rate decreased from2 Emigration rates are calculated and projected separately for different agegroups and genders.3 Actual registered emigration and immigration statistics are used for the firsthalf of 2011.4 Labour force (the sum of employed and unemployed) over population aged 15and over.5 Swedbank Baltic Sea Analysis No. 29 • 27 October, 2011
  6. 6. 58.4% to 55.9%. However, along with increasing activity, the size of thelabour force bounced back thereafter, reaching 1.635 million, almost its2001 level, in 2010.The size of the labour force peaked at 1.642 million in 2003 and again at1.641 million in 2009. The labour force is projected to decrease, in linewith 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 Labour force will be2010 and will continue to decline more rapidly for the next five years, shrinking faster thanreaching 2.123 million in 2016 - some 7.5% lower than in 2010 and 4.4% population.lower than in 2011. It is projected that the pace of decrease will be morerapid 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 numberof 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 partlydue to the gradually increasing retirement age, but also due to the greaterpersonal motivation to stay in the labour force. Second, the latest labourforce data suggest that the actual labour force activity rate has increasedlately, probably due to the emigration of previously economically inactivepeople. The labour force decreased much less than the working-agepopulation; this was caused by the higher-than-actual registered emigra-tion. As this suggests that emigration was not registered and accountedfor earlier, the actual labour force activity rate was underestimated. Thistrend is likely to continue, and the higher activity rate will become perma-nent, especially if social benefits for unemployed become less generousin comparison to salaries.The increasing retirement age should support the growth of the activityrate as well. The retirement age will start to increase again, beginning in2012, by four months a year for females and by two months a year formales until 2026, when it will reach 65 years. Currently, the retirementage 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 fallingfrom 2011 to 2016. A labour force of only 1.513 million would be left in2016 if the activity rate were to decrease by 0.35 percentage point (theaverage decrease from 2001 to 2007) every year.6 Swedbank Baltic Sea Analysis No. 29 • 27 October, 2011
  7. 7. Labour force, population (15-64), activity rate (15 years and above) 2.0% 61.0% 1.5% 60.0% Labour 1.0% 59.0% force, % 0.5% 58.0% change (ls) 0.0% 57.0% Population-0.5% 56.0% 15-64, % change (ls)-1.0% 55.0%-1.5% 54.0% Labour-2.0% 53.0% force activity rate,-2.5% 52.0% % (rs)-3.0% 51.0%-3.5% 50.0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Statistics Lithuania, SwedbankEven though the number of children will start to increase in 2014 due tohigher fertility rates, the size of the population aged 15 and over will stillbe shrinking. Fewer and fewer people will be entering the working-agegroup due to the decrease in fertility and birth rates from the 1990s to2003. The group of people aged 15-24 will be decreasing the fastest. Theage groups from 35 to 49 will decrease by more than 10% from 2010 to2016 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 overwill increase by more than 10% during 2010-2016.Therefore, the labour force will not just decrease but probably also be- The group of people agedcome older as the increase in the mean ages of the population aged 15- 15-24 will be decreasing64 years and over 14 years gathers pace. The mean age will reach 39.6 the fastest and labouryears (population aged 15-64 years) and 46.8 years (15 years and over) force will age faster thanin 2016, which is, respectively, 1.4 and 1.7 years more than in 2010. Incomparison, from 2001 until 2010, the mean age in the same age groups the population.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 thegroup of average-aged people the most. The share of emigrants in thisgroup, 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 reversesthat 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 oldfaster. The difference between the age of the males and females wasincreasing linearly, except for 2011, and is projected to expand from 4.6years in 2001 to 5.5 years in 2016.7 Swedbank Baltic Sea Analysis No. 29 • 27 October, 2011
  8. 8. Mean age by gender and age group, years4846 Males44 Females42 Population40 Population38 (15-64) Population36 (15 and over)34 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Statistics Lithuania, SwedbankThe labour force will become not only older and more experienced, there-fore, but probably also more educated in coming years. The percentage Labour force shouldof people with higher university and nonuniversity education is projected become more educatedto increase, while the number of people who have only primary or lower and experienced.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 ofthe labour force, which is bound to decrease at an accelerating pace,more attention should be paid to productivity growth. It is likely that amore experienced and educated workforce will be able to become moreproductive and somewhat counteract the negative effect of the dwindlingnumber of working people.Even though it would be hard to estimate the effect of the size and age Economic growth maystructure of the labour force on Lithuanias economic growth due to the decrease with decreasingshort span of the time series, different studies made in Europe suggest proportion of workingthat the correlation between the change in age structure and economic force, not only in term ofgrowth is significant and robust. Economic growth decreases with a de- output per person butcreasing 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 of also in term of output permore time spent on household chores as dependency ratios increase, or worker.because of a demand shift towards services, which have slower produc-tivity growth and lower saving rates. One of the European studies alsofound a “significant jump shaped pattern for the workforce age structureon economic growth.“ It is argued that “it is straightforward to includedemographic forecasts when projecting economic growth rates“ as it is„an important and robust determinant (with respect to the inclusion ofvarious economic variables) of past economic growth rates.” 5This 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 thisstudy 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 theEU. Research Report No. 32.8 Swedbank Baltic Sea Analysis No. 29 • 27 October, 2011
  9. 9. There also may exist other channels - such as different saving and in- 5vestment behaviour and human capital formation.However, other studies suggest that the relationship between age and Older people are beingproductivity depends on occupation, and that it is important to understand and will continue to bethat past trends may change along with a changing environment. Currentdemographic developments might have a positive effect on productivity. encouraged to becomeEven though the labour force may become less flexible in terms of mobil- more innovative andity and adopting new methods, the increasing life span suggests that be- active .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 andwill 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 tocome should encourage older people to try harder to satisfy the needs ofthe 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 ratehas been increasing recently. There are not many alternatives for thosewho 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 capitalto the labour force. Therefore, the decreasing size of the labour force andthe greater pressure to increase wages should strengthen the stimulus toinvest in more efficient technology and decrease the reliance on thescarce labour.Nevertheless, increasing productivity may result in higher wages, espe-cially in the public sector. If wage growth exceeds productivity growth, itmay 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 Asianeconomies, which demonstrated high and sustained growth for a verylong period of time, is thought to be strongly associated with an increas-ing proportion of working-age people as well. Studies have shown thatfavourable demographic conditions could be responsible for about 2 per-centage points of the income growth in East Asia, or about one- third ofthe “miracle”6.The much less favourable demographic conditions in Lithuania, eventhough they may have positive as well as negative effects on productivity,suggest that we will have to find new ways to sustain economic growthand 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 years 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 ensuringthat the later a person retires, the greater are the social benefits for him.The employers and older employees might be encouraged to take part inEU active aging programs, which supports training.6 See Bloom, D. E. (2011). Population Dynamics in India and Implications forEconomic Growth. Harvard School of Public Health. Program on the GlobalDemography of Aging. Working Paper No. 65.7 According to mid-September 2011 projection.9 Swedbank Baltic Sea Analysis No. 29 • 27 October, 2011
  10. 10. There is room to increase labour force activity rateThe labour force activity rate during the last 10 years increased signifi- Activity rates increasedcantly only in the age group of 55-64 years. This was mostly influenced most among those agedby the raising of the retirement age, although the activity rate of people 55-64 and decreasedaged 60-64 kept increasing after 2006 – when the pension age stopped among those aged 15-24.rising - as well.The activity rate of the population aged 55-59 years has exceeded theactivity rate of the entire working-age (15-64 years) population since 2003by up to 5.5 percentage points. The difference between the participationrate of the working-age population and that of people aged 60-64 de-creased from 44.5 percentage points to 34 percentage points from 2001to 2010.The activity rate was decreasing the most among the youngest (15-24years) people. Even though their activity rate was picking up from 2006 to2008, it still remained lower than the average for 2001-2003 Labour force activity rate by different age group, %80706050 15–6440 55–59 60–6430 15-242010 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Statistics LithuaniaThe activity rate among 15-24-year old in Lithuania is much lower than in Activity rates inthe EU, as well as in Latvia and Estonia; this is because, over the last 10 Lithuania lag behind theyears, the rate decreased in Lithuania while it increased in the other two EU or Latvia andBaltic countries. The fact that students in Lithuania enter the labour mar- Estonia.ket less actively than in the other countries may indicate that it may beharder for them to work during their studies; this problem may be due to alack of flexibility in the labour market that prevents young people fromsuccessfully complementing their studies with practice. The participationrate of older people (55-64 years) is higher in all three Baltic countriesthan the EU average. However, in Lithuania the rate was still lower thanin Latvia and Estonia from 2005 to 2010.The activity rate of Lithuania’s working-age (15-64 years) population in2010 was only 0.5 percentage point lower than the EU average; however,it was 2.7 and 3.3 percentage points lower than Latvias and Estonias,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% (in2010), it was still lower than in Estonia (63%).The difference between activity rates for males and females (15-64years) in Lithuania decreased by 4.1 percentage points over the past 1010 Swedbank Baltic Sea Analysis No. 29 • 27 October, 2011
  11. 11. years. Males were only 3.6 percentage points more active than females -their activity rate was 72.4%, compared with 68.8% among females in2010. The gender-activity gap decreased most during 2009 and 2010,allowing Lithuania to become the leader in the EU in this demographicparameter, as the average gender-activity gap in the EU in 2010 was13.2 percentage points.However, this is not entirely a positive trend, as it came at the expenseof a male activity rate that was lower than the EU average, as well asLatvias and Estonias. The female activity rate had historically beenhigher than the EU average; however, in 2004-2005, it was growingslower than in the EU, Latvia and Estonia and became lower than inthese 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 themale 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 influencedby many other factors, such as the overall economic situation and fertilitypolicy. However, it still seems reasonable that the historically higher fe-male activity rate might have been associated with lower fertility rates onaverage. The higher female activity rate may have been a factor in theincreasing average age of women at childbirth, as working females tendto postpone their motherhood. A higher average age of women at child-birth depresses the current birth rate8, and a higher age of first-timemothers 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, %8075 EU (males)70 Lithuania (males) Lithuania (females) EU (females)6560 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: EurostatFemale unemployment in the EU was higher than male unemploymentfrom 2001 to 2009. However, Lithuania did not differ much from the othertwo Baltic countries in terms of the gender unemployment gap. On aver-age in Lithuania, male unemployment was higher than female by a similaramount 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) inLithuania. The gap tends to widen more during times of adverse eco-nomic conditions, as there are more males employed in sectors, such asconstruction, that are particularly vulnerable to economic downturns.8 More about the effect of increasing average age of women at childbirth on birthrates in 6th section .11 Swedbank Baltic Sea Analysis No. 29 • 27 October, 2011
  12. 12. However, male participation did not decrease when the gender unem-ployment gap was the widest. Male participation was decreasing mostsignificantly in 2004-2006, when there was a rapid decrease in total un-employment.Finally, even if activity rates were underestimated only in Lithuania overthe last few years, the gap between Lithuania’s activity rate and those inthe other two Baltic countries, as well as the EU, suggests that there isstill room for improvement.The activity rate among the youngsters (15-24 years) in Lithuania lagsbehind that in the EU, and even though older people (55-64 years) aremore active than in the EU, this activity rate still lags Latvias and Esto-nias. Just because Lithuanias overall activity rate is similar to the EUaverage is not enough to think that Lithuanias position will remain good:all European countries are facing similar demographic challenges and arenot likely to not respond to them.More incentives to look for a job could be created, first, by increasing thedifference 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 thosewho do not want to work at all. Looked at from a different angle, asharper focus on developing self-motivation through different methods ofeducation should lower the number of people who do not want to work.Therefore, education, whose main goal should be to induce interest in asubject rather than to force students to memorise facts, should help aswell.Higher age dependency, but lighter burden for the employedThe age-dependency ratio was falling during 2001-2010; however, this Age-dependency ratiowas caused by a decrease in the number of children compared with the and dependency onpopulation aged 15-64, as well as by an increase in the proportion of the employed will be movingelderly during that period. in opposite directions until 2016.The decreasing size of the working-age (15-64 years) population willcause the age-dependency ratio to rise. This will reach the 2003-2004level in 2016, as there will be 48.3 children and elderly people for every100 people of working age. This ratio will be growing because the propor-tion of children will increase beginning in 2011 and the proportion of theelderly will continue to increase.The dependency-on-employed ratio, which shows the number of children,elderly people, and unemployed per 100 employed, was influencedmostly by the significant fluctuation in unemployment, as this ratio de-creased from 17.4% in 2001 to 5.6% in 2006 before bouncing back to17.8% in 2010. The ratio‘s decline and increase was even steeper due tothe 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 nextfour years, mainly because employment will rise. However, the pace ofthis 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 2008level, there would still be 0.7 more dependent on the employed in 2016than in 2008. This is due to the increased number of the elderly, togetherwith the smaller size of the labour force.12 Swedbank Baltic Sea Analysis No. 29 • 27 October, 2011
  13. 13. 9 10 Age-dependency ratio , dependency on employed ratio , %55 11050 100 Children (ls)45 9040 80 The elderly (ls)35 70 The elderly/Employed30 6025 50 Išlaikomų žmonių ir20 40 bedarbių koeficientas*15 30 Children/Employed10 20 Bendrasis išlaikomų 5 10 žmonių koeficientas** 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Statistics Lithuania, SwedbankTotal fertility rate - increasing and underestimatedIt is projected that the exponential growth of the total fertility rate (TFR), TFR is projected toas well as the increase in the number of births recorded from 2006 to increase to 1.7, though2008, will slow. However, the TFR should still grow by about 2% yearly, the measure is likely torising from 1.5 to 1.7 during 2010- 2016. be underestimated due to increasing age ofThe increase in the number of births will decelerate due to a decrease in mothers.the number of women of reproductive age (15-49 years). The number ofpotential mothers will be decreasing faster than the overall populationand the population aged 15-64 for the next five years. The increase in thenumber of births is supported by the increasing age of mothers, as thenumber of the youngest women (aged 15-24) will be shrinking muchmore than the number of older females.Even though a projected annual increase in the TFR of about 2% maylook overly optimistic in light of the increasing uncertainty, the possibleunderestimation of the TFR in earlier years should be taken into accountas well. The latest data on the labour force suggest that actual emigrationwas lower in 2010 than registered emigration, meaning that all those reg-istered must have left the country sometime earlier. This, in turn, wouldlower the actual number of women in previous years. Moreover, this sup-position is supported by the latest census results, which show a muchsmaller number of inhabitants than previously thought.Still the TFR, which is projected to reach 1.7 in 2016 (1.5 in 2010), willremain below a sustainable level, as the average woman during her re-productive period of life will give birth to fewer than 2 children. Unless theTFR is about 2.1 (the replacement rate in industrialised countries) womenwill 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 employedas of January 1.13 Swedbank Baltic Sea Analysis No. 29 • 27 October, 2011
  14. 14. Total fertility rate, number of births41000 1.8 1.6539000 1.5 1.3537000 1.2 1.0535000 0.9 Nb. of births 0.75 Total fertility rate (rs)33000 0.6 0.4531000 0.3 0.1529000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Statistics Lithuania, SwedbankOn the other hand, the TFR must have been underestimated due to theincrease 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 isstill below the EU average.When the mean age of giving birth is increasing, the number of birthsgiven by younger women decreases, putting downward pressure on theTFR. However, this movement is misleading: a woman may have thesame number of children during her life, but, as children are born in lateryears, the number of births decreases only during this period.11This 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 atthat 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 effectdisappears as well; however, the mean age of mothers in Lithuaniashould be still increasing for the next five years. In 2008, the differencebetween the mean age of women at childbirth in Lithuania and the EUwas 1.5 years; this will decrease to 0.7 in 2016 if the trend growth in bothtime series continues.11 See Philipov, D., Sobotka, T. (2006). Estimating tempo effect and adjustedTFR. Vienna Institute of Demography. Austrian Academy of Sciences.12 See European Commission working document “Demography report 2010 -Older, more numerous and diverse Europeans.”14 Swedbank Baltic Sea Analysis No. 29 • 27 October, 2011
  15. 15. Mean age of women at childbirth31302928 Lithuania27 EU262524 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Statistics Lithuania, Eurostat, SwedbankIt is likely that the fertility rate will become a more important factor for the Fertility rate maysize of the population change, as emigration, which in 2010 was likely become more importantmuch lower than the official statistics, is to slow down, and there are no factor for the size ofsigns of a change in immigration policy. population change.Sustainable economic growth depends on timely demographic pol-icy actionLithuania faces such demographic challenges as an aging population, Demographic changelow birth rates, high emigration, and sluggish immigration. These devel- decreases the size ofopments decrease the share of the labour force in the overall population labour force andand threaten the social security system, as well as economic growth. threatens social security system.Even though the TFR is probably underestimated, it is still important toensure that birth rates do not decrease in the long term. The populationwould not have decreased as much and the labour force would not haveaged as fast if fertility rates had been higher in the past.Emigration must have been the main cause of the shrinking population inrecent years. It has significantly decreased the number of people andcontributed to the aging of the population. The low historical fertility ratesand emigration have also caused the labour force to shrink faster thanthe total population and to speed up its aging.However, emigration is a natural process experienced by all the countriesthat have joined the EU and opened their borders. This process becomesless 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 wagesabroad.The government has raised the low fertility rate in Lithuania during thelast few years by providing very favourable conditions for maternity leave.However, the resulting financial burden has been too heavy for the SocialSecurity Fund, whose deficit has increased significantly. Furthermore, thetwo-year maternity leave has had a negative impact on the labour marketand, possibly, the professional competencies of the mothers. Eventhough the fertility rate has increased, Lithuania can not afford such apolicy. 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 achild is registered just after birth. The fertility rate is dependent on theoverall condition of the economy, and, therefore, a successful policy for15 Swedbank Baltic Sea Analysis No. 29 • 27 October, 2011
  16. 16. sustaining economic growth would itself positively influence the fertilityrate.The rising proportion of the elderly and children, on the one side, and thedecreasing size of the labour force, even though it may become moreexperienced and educated, on the other, may threaten the sustainabilityof public finances, as incomes may increase less than expenditures andreduce potential growth.Therefore, the efforts of policymakers should be targeted at increasing Efforts should beparticipation rates, easing immigration policy, and sustaining higher fertil- targeted at increasingity rates, as well as ensuring the soundness of public finances and sus- participation rates,tainable growth. easing emigration policy, and sustaining higherThe size of the labour force may be increased by prolonging the period of fertility rates andinvolvement. The most obvious way to implement this is to raise the pen- soundness of publicsion age, as this appeared to be effective in increasing the participation finances.among those aged 55-64 in the past. Meanwhile, the decreasing activityrate among the youngest people (20-24 years) might be increased byreducing the time needed to acquire an education. Lithuania could followthe example of advanced countries, whereby students could finish theirstudies in shorter periods of time at the expense of the long Lithuaniansummer holidays.As the participation rates of both the above-mentioned demographicgroups lag behind those of the EU--or, at least, behind Latvias and Esto-nias-- 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 increaseemployment among the youngest, beginning in August 2010, the socialsecurity tax was lowered from 31% to 7.7-8.4% for employers hiring aperson who had never worked before. This exemption is temporary andwill expire in July 2012. However, this could be too short a period of timeto lower the youth unemployment rate from its high in 2010 (35.1%), aswell as too short to possibly increase the youth participation rate.The experience of the EU and the other two Baltic countries suggeststhat 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 bydeveloping self-motivation through establishment of different methods ofeducation 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 socialsecurity system as the proportion of pensioners rises.Finally, Lithuania should be preparing to review its immigration policy. Asthe demographic situation in Lithuania becomes more similar to the EUs,there is more stimulus for Lithuania to start achieving the goals declaredby the EU. These are to “tap the potential of the two fastest growingsegments in the population: older people and immigrants,“ and to in-crease productivity, as all this is crucial for economic growth and greatersocial cohesion.13 The fact that Lithuania faces demographic challengessimilar 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.16 Swedbank Baltic Sea Analysis No. 29 • 27 October, 2011
  17. 17. tries will be trying to attract immigrants. Therefore, timely and proper ac-tions will determine which countries with dwindling populations will besuccessful in attracting workers.The emigration policy is dependent on EU regulations. Nevertheless, ittakes 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 avacancy in the Lithuanian Labour Exchange a month before. A foreigneralso has to have at least two years of working experience in a particularfield during the past three years. A foreigner cannot work longer than twoyears as well. Therefore, the option of hiring a foreigner is time-consuming and expensive, even if no suitable person can be found withinthe 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 outlookand a more favourable immigration policy.It seems that the current policy actions may not be enough to counteract Sustainable economicthe demographic challenges to growth and social welfare. However, eco- growth and increase innomic growth and demographics are interrelated. Neither an increased recruitment of native andpension age, nor higher activity rates or more friendly immigration policy foreign population arewill help unless there is sustainable economic growth and an increase in the best cures.recruitment of native population and foreigners. Otherwise, only the num-ber of unemployed would increase, making the social security systemeven more fragile, and the worsening economic conditions would lowerthe 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 andsustainable economic growth. Without appropriate demographic policy atan early stage, any later actions would become less and less effectivedue to the worsening economic situation induced by these demographicdevelopments. Nerijus Mačiulis Vaiva Šečkutė17 Swedbank Baltic Sea Analysis No. 29 • 27 October, 2011
  18. 18. AbbreviationsEU – European Union (27 countries)EU-15 – European Union of 15 member statesTFR – Total fertility rateReferencesBloom, D. E. (2011). Population Dynamics in India and Implications forEconomic Growth. Harvard School of Public Health. Program on the GlobalDemography of Aging. Working Paper No. 65European 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). TheRelationship Between Demographic Change and Economic Growth in the EUResearch Report No. 32.18 Swedbank Baltic Sea Analysis No. 29 • 27 October, 2011
  19. 19. Economic Research DepartmentSwedenCecilia Hermansson +46 8 5859 7720 cecilia.hermansson@swedbank.seGroup Chief EconomistChief Economist, SwedenMagnus Alvesson +46 8 5859 3341 magnus.alvesson@swedbank.seSenior EconomistJörgen Kennemar +46 8 5859 7730 jorgen.kennemar@swedbank.seSenior EconomistAnna Ibegbulem +46 8 5859 7740 marie-anne.larsson@swedbank.seAssistantEstoniaAnnika Paabut +372 888 5440 annika.paabut@swedbank.eeActing Chief EconomistElina Allikalt +372 888 1989 elina.allikalt@swedbank.eeSenior EconomistLatviaMārtiņš Kazāks +371 67 445 859 martins.kazaks@swedbank.lvDeputy Group Chief EconomistChief Economist, LatviaDainis Stikuts +371 67 445 844 dainis.stikuts@swedbank.lvSenior EconomistLija Strašuna +371 67 445 875 lija.strasuna@swedbank.lvSenior EconomistLithuaniaNerijus Mačiulis +370 5 258 2237 nerijus.maciulis@swedbank.ltChief Economist, LithuaniaLina Vrubliauskienė +370 5 258 2275 lina.vrubliauskiene@swedbank.ltSenior EconomistVaiva Šečkutė +370 5 258 2156 vaiva.seckute@swedbank.ltSenior Economist19 Swedbank Baltic Sea Analysis No. 29 • 27 October, 2011
  20. 20. DisclaimerThis research report has been prepared by economists of Swedbank’s Economic Research Depart-ment. The Economic Research Department consists of research units in Estonia, Latvia, Lithuania,and Sweden, is independent of other departments of Swedbank AB (publ) (“Swedbank”) and respon-sible for preparing reports on global and home market economic developments. The activities of thisresearch department differ from the activities of other departments of Swedbank, and therefore theopinions expressed in the reports are independent from interests and opinions that might be expressedby other employees of Swedbank.This report is based on information available to the public, which is deemed to be reliable, and re-flects the economists’ personal and professional opinions of such information. It reflects the econo-mists’ best understanding of the information at the moment the research was prepared and due tochange of circumstances such understanding might change accordingly.This report has been prepared pursuant to the best skills of the economists and with respect to theirbest knowledge this report is correct and accurate, however neither Swedbank nor any enterprise be-longing to Swedbank or Swedbank directors, officers, or other employees or affiliates shall be liablefor any loss or damage, direct or indirect, based on any flaws or faults within this report.Enterprises belonging to Swedbank might have holdings in the enterprises mentioned in this reportand provide financial services (issue loans, among others) to them. Aforementioned circumstancesmight influence the economic activities of such companies and the prices of securities issued by them.The research presented to you is of an informative nature. This report should in no way be interpretedas a promise or confirmation of Swedbank or any of its directors, officers, or employees that theevents described in the report shall take place or that the forecasts turn out to be accurate. This reportis not a recommendation to invest into securities or in any other way enter into any financial transac-tions based on the report. Swedbank and its directors, officers, or employees shall not be liable forany loss that you may suffer as a result of relying on this report.We stress that forecasting the developments of the economic environment is somewhat speculative innature, and the real situation might turn out different from what this report presumes.IF YOU DECIDE TO OPERATE ON THE BASIS OF THIS REPORT, THEN YOU ACT SOLELYON YOUR OWN RISK AND ARE OBLIGED TO VERIFY AND ESTIMATE THE ECONOMICREASONABILITY AND THE RISKS OF SUCH ACTION INDEPENDENTLY.20 Swedbank Baltic Sea Analysis No. 29 • 27 October, 2011

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