The potential for further growth in total employment

(Author: Jan Šolc)

Total employment recorded its highest-ever year-on-year growth in 2016 Q4. At the same time, the general unemployment rate fell well below the 4% level. This raises the questions of what is fostering such sharp employment growth and what further developments we can expect when the unemployment rate is already so low.

The labour force has been contributing increasingly strongly to employment growth as the unemployment rate has declined. Unlike in 2014 and 2015, when employment growth was driven mainly by a falling number of unemployed persons, its surge has been supported chiefly by growth in the labour force (see Chart 1). The potential for growth in employment through a further drop in the number of unemployed persons continues to decrease as the unemployment rate falls to a historical low. In the event of continued economic growth coupled with rising demand for labour, any further growth in employment will be conditional on an increase in the labour force.

Chart 1 (BOX)  Employment and the labour force
The share of the labour force in employment growth increased during 2016
(annual percentage changes; age 15 years or more)

The labour force has long been growing due to demographic trends. Since 2010, however, the contribution of this factor has been mostly negative (see Chart 2). This is due mainly to the baby bust generation born from the mid-1990s onwards. According to demographic outlooks, the population will not rise markedly in the coming years either, and the contribution of the size and age composition of the population to labour force growth will probably remain negative.

Chart 2 (BOX)  Decomposition of labour force growth
Labour force growth has been driven in recent years by the participation rate
(annual percentage changes; contributions in percentage points; age 15 years or more)

As in the last few years, labour force growth will continue to be closely determined by the participation rate.1 As with employment growth, the growth in the participation rate – the share of the number of employed and unemployed persons in the population in the given age group – in the last five years or so has been driven by the over 60s, i.e. people of (pre )retirement age (see Chart 3). This is due to two factors. The first is a higher supply of part-time employment, which has helped lift the participation of other age groups as well, especially last year. In addition, the participation rate of the oldest age group is being strongly affected by a gradual increase in the retirement age, which has raised the labour force by almost 100,000 persons in the past five years. A gradually rising statutory retirement age until 2037 (with a current cap at 65 years and regular revision of this figure) will affect the participation rate in the coming years, too.

Chart 3 (BOX)  Decomposition of the participation rate
The oldest age group has been the main driver of growth in the participation rate in recent years
(annual percentage changes; contributions in percentage points; age 15 years or more)

The expectation of continued convergence of the Czech and German participation rates opens up space for further growth in the labour force. To estimate the potential increase in the labour force due to growth in the participation rate, we can compare the participation rates in the Czech Republic and Germany.2 This comparison reveals that the Czech figures are much lower in the 15–24 and 60–64 age groups (by almost 20 percentage points; see Chart 4). If the German participation rates were applied to the Czech demographic structure, the result would be an increase in the labour force in the Czech Republic of almost 250,000 persons.3 However, such a sizeable increase is not likely in the near future, as the participation rate in the youngest category is affected to a large degree by the parameters of the education system, and the higher participation rates in higher age groups in Germany are linked with a markedly higher percentage of part-time employment (see Chart 5). Part-time employment is far lower in all age categories in the Czech Republic than in the EU4 despite a significant increase in the share of part-time jobs in total employment growth last year.

Chart 4 (BOX)  Differences in participation rates compared with Germany
The biggest differences between the Czech and German participation rates are in the youngest age group and the 60–64 age group
(Czech Republic minus Germany; percentage points; age 15 years or more)

Chart 5 (BOX)  Share of part-time employment in total employment
The share of part-time employment in the Czech Republic is low in the European context
(broken down by age group; percentages; age 15–64 years)

To sum up, any further growth in employment will probably be very limited. Given the low unemployment rate, the potential for further employment growth lies mainly in growth in the labour force and, owing to the Czech demographics, will depend heavily on the participation rate. The latter will probably increase further due to a gradually rising retirement age and expected growth in the supply of part-time employment. However, both these factors indicate that growth in the labour force will be sluggish, amounting to a few tens of thousands of persons a year. Given the currently favourable economic outlooks, this will lead to gradually strengthening upward pressures on wages.

1 This holds if the conditions for migration are not significantly relaxed despite the observed increased demand of Czech firms for foreign workers. Foreign workers are monitored by the Labour Force Survey to only a limited extent.

2 The retirement age in Germany has gradually been raised from 65 years to 67 years since 2012.

3 The calculation is done across five-year groups broken down by gender. As Chart 4 shows, this would mean a drop in the participation rate for some age groups.

4 The Netherlands has long had the highest share of part-time jobs in employment in the EU.