The Impact of Health and Education on Labor Force Participation in Aging Societies – Projections for the United States and Germany from a Dynamic Microsimulation
Using a highly stylized dynamic microsimulation model, we project the labor force of the United States up to the year 2060 and contrast these projections with projections for Germany to assess differential effects on outcomes The projections are consistent with the U S Census Bureau’s and Eurostat’s demographic projections. Our modeling approach allows to show and quantify how policy changes the future size of the labor force, which we assess with a series of what-if scenarios.
Both the US and Germany are expected to undergo demographic aging, but their demographic fundamentals differ starkly. This has strong implications for their labor force developments. According to our microsimulation, the US labor force will, despite population aging, increase by 16.2 percent in the age groups 15 to 74 (corresponding to 25.2 million workers) between 2020 and 2060, while Germany will experience a decline by 10.7 percent (4.4 million workers). In these baseline projections, improvements in the education structure will add about two million persons to the US labor force and about half a million persons to the German labor force by 2060.
In the what-if scenarios, we examine the implications of improvements in the educational structure of the population and of policies which address the health impediments for labor force participation. Of the educational scenarios that we evaluate, increasing the number of persons who achieve more than lower education has the strongest positive impact on labor force participation, relative to the number of additional years of schooling implied by the various scenarios. Shifting people from intermediate to higher education levels also increases labor force participation in higher age groups, however, this is partially offset by lock in effects at younger ages.
Our projections highlight that improvements in the labor market integration of people with health limitations provide a particularly promising avenue to increase labor force participation rates and thus help to address the challenges posed by demographic aging. If the health gap in participation rates in the United States were similar to that currently observed in Sweden, the labor force in 2060 would be larger by about 14.9 million persons.
We thank Stefan Weingärtner for excellent research assistance throughout the project that led to this working paper. The research reported herein was performed pursuant to grant RDR18000003 from the US Social Security Administration funded as part of the Retirement and Disability Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA, any agency of the Federal Government, or NBER. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof. This paper builds also on previous research funded by the Bertelsmann Stiftung and published in Horvath, Kaniovski, Leoni, Spielauer and Url (2021).