Changes in population composition will lead to slower labour force growth

Economic Commentaries, News Demographic changes in the coming years mean that both the labour force and employment are expected to grow more slowly than over the past decade. This is according to a study by Iida Häkkinen Skans and Pernilla Wasén, who work in the Monetary Policy Department of the Riksbank.

The labour force participation rate and employment rate in Sweden are high from both international and historical perspectives. The sharp increase in the employment rate of people born abroad in recent years shows that, over time, the labour market can adapt to changes in the supply of labour and also that the general demand for labour has been high.

In the coming years, however, changes in the composition of the population are expected to lead to significantly slower growth of the labour force than in the last decade. This is due to both lower population growth and changes in the age composition. After 2025, labour force growth is expected mainly to be in the young (aged 15–24) and older (aged 65–74) groups. As young and older people have lower labour force participation rates, this will lead to the total labour force participation rate decreasing slightly in the coming years.

Broken down into those born in Sweden and those born abroad, future labour force growth will solely be due to the foreign-born group increasing. The trend increase in the employment rate among foreign-born persons, and especially the strong increase after the pandemic, is therefore very positive for the future development of the Swedish labour market. However, foreign-born people continue to have a significantly lower employment rate than Swedish-born people. Changes in the composition of the population are expected to contribute to a slight decline in the overall employment rate in the coming years. A sustainable improvement in the labour market integration of those born abroad would mean lower equilibrium unemployment and higher employment and output.

Factors other than changes in population composition also affect the labour market and the Riksbank takes these into account in the forecasts published regularly in the Monetary Policy Report.

Authors: Iida Häkkinen Skans and Pernilla Wasén, working at the Monetary Policy Department

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Updated 07/11/2023