Coronavirus crisis and skills shortage are stifling growth

• Without a suitable response, the German economy may stop growing by 2040
• Skills shortages already affect two thirds of all occupations
• In one fifth of shortage occupations, vacancies remain open for more than 160 days

The coronavirus crisis has overshadowed the challenges the German economy is facing from growing skills shortages and weak productivity. But as the economy gradually reopens, the shortage of skilled workers will be more readily felt again in many sectors. A current study by KfW Research analysed the current skills shortage and how it might develop up to 2040.

“The German economy can respond to the skills shortage and productivity weakness mainly through more investment, innovation, training and qualification measures. Our economy also needs these ingredients to overcome the coronavirus crisis and its consequences as quickly as possible. We therefore need a long-term public- and private-sector growth and investment initiative for the coming years – not just in Germany but in Europe. The key fields of action are crisis resilience, climate action and productivity growth through innovation and digitalisation”, sagt Dr Fritzi Köhler-Geib, Chief Economist of KfW Bankengruppe.

The key findings of the study:

Skills shortages now affect broad segments of the economy.

• Compared with the supply of skilled workers ten years ago, two thirds of occupations can now be classified as a shortage occupations.

The top shortage occupations include:

• Construction occupations
• Occupations related to digitalisation
• Geriatric care
• Increasingly, medical occupations such as physicians of various disciplines, chemists, pharmacists
• One fifth of occupations are among the top shortage occupations. Not only is there an insufficient pool of these workers, but open positions remain vacant for more than 160 days before they are staffed, which is at least 30% longer than the average.

The main causes of skills shortages are demographic change and decreasing productivity growth.

• Germany’s population has already contracted by 2 million people since 2004. As the population shrinks, so, too, does the supply of skilled labour. Skilled migration is therefore becoming increasingly important. In the past three years, foreign workers contributed half of the employment growth, and the trend is rising.
• Labour productivity per worker in Germany grew by just 0.5% per year from 2005 to 2019. If Germany’s GDP is to grow more strongly, the only way this can happen is by increasing productivity growth or the workforce.

Without an adequate response, growing skills shortages and weak productivity growth will evolve into a serious growth obstacle by 2040.

• Although the economy would continue to grow even with a low migrant intake and persistently weak productivity growth, the growth rates would fall significantly already by 2030 and approach zero by 2040.
• Growing shortages in the supply of goods and services would have to be expected.
• Increasingly fewer workers would have to provide for increasingly more pensioners. The baby boomer cohorts and rising life expectancy will drive the population aged 67+ up by more than 5 million to more than 21.4 million by the year 2040.
• The consequences of this development would primarily affect socially vulnerable people and low income earners. This can lead to increasing distribution conflicts. It could also affect the acceptance of investments in climate change action.

The response must address labour force potential, labour market participation and productivity.

“Right now, the most urgent task is to tackle the coronavirus crisis. It is essential that the private sector takes responsibility here as well. Concerted action on the part of business associations might have an even greater impact, for instance by mobilising funds to boost the supply of personal protective equipment as well as test and vaccine development. But it will only take a few years for the skills shortage and weak productivity development to once again be among the greatest challenges for the German economy. Higher productivity growth can be achieved only with more investment, more innovation and digitalisation, and through improved training”, sagt Dr Fritzi Köhler-Geib, Chief Economist of KfW.

The current analysis by KfW Research can be retrieved from www.kfw.de/fokus