Mario Draghi faces an age-old problem as he tries to revive euro-area inflation.
A rapid rise in the importance of older workers in the currency bloc’s labor market over the next five years is set to prove a drag on inflation already about a quarter of the European Central Bank’s target of just below 2 percent, according to Marchel Alexandrovich, an economist at Jefferies International Ltd. in London.
Since 2008 the number of workers aged between 50 and 64 has gained in the main euro-area nations and now account for 26 percent to 31 percent of total employment, up from 20 percent to 25 percent previously. Employees aged more than 65 have also increased, yet the amount still lags the U.S. and U.K., suggesting to Alexandrovich that the “euro-area economics may only be at the start of what is a long-term structural shift toward increased importance of older workers.”
If so, then ECB President Draghi has another structural factor to worry about as he tries to prevent deflation with easy monetary policy. That’s because older workers tend to defer consumption and save for the future, while youngsters entering the labor market are more likely to consume today.
While data are hard to find for the euro area, an Institute for Fiscal Studies analysis of the U.K. suggests that from 2000 and 2005, British workers aged 55 to 59 had an average annual saving rate of about 5.5 percent, while those less than 34 ran up no savings.
“So a recovery where jobs are going predominantly to older workers, which is what is happening today, will look very different than that where younger workers are getting jobs for the first time,” said Alexandrovich in a report to clients. “All things being equal, it would imply weaker consumption and a softer profile for inflation.”
The higher propensity to save also implies downward pressure on interest rates, which Draghi cut to record lows last month to encourage economic growth, Alexandrovich said.
While it may be demographics in play, Alexandrovich said the bulk of older workers are staying in the labor market or re-entering it because they want or need to. The activity rate in Germany of 50 to 64 year olds, for example, has increased 12 percentage points in the past decade and now 18 million of that cohort are in work.
A recent study by the European Commission’s statistics division found around 50 percent of European workers already receiving a pension are sticking with work to maintain an income.
There is one offsetting force for inflation in that older workers tend to be less productive, which may make economies more prone to price pressures than if youngsters formed the labor market, said Alexandrovich.
“So there are lots of unknowns and moving parts to this aging labor force story,” he said. “But it also perhaps at least partly helps explain why the ECB, the Federal Reserve and the Bank of England have all struggled to forecast inflation accurately over the past several years.”