Summer 2023

From doom to boom: an Italian case study

Italy has an opportunity to drastically increase its workforce, despite falling population numbers, explains Katharine Neiss, chief European economist, PGIM Fixed Income.

Demographic change associated with ageing populations and declining birth rates is a slow burn issue, but it has been increasingly attracting attention. It is generally described as a ‘ticking time bomb’ as the world is headed for a ‘doom of demographic decline’. But is it really that bad and, if so, what can be done about it?

It is important to put the demographic change into perspective. Change is happening because people are living longer, healthier lives and able to choose family size. These are signs of human progress and not the outcome of some sort of disaster scenario. That said, the changes do pose policy challenges that require politically challenging trade-offs.

Italy, a country that is ageing at a faster rate than its European peers, offers a useful case study. Istat published data showing that Italy’s population has fallen below 60m. Based in part on current trends, it projects that Italy’s population will shrink a further 20% by 2070. As striking as these numbers are, it is worth noting that such projections are highly sensitive to the cumulative impact of underlying assumptions. As investors well know, the past is not always a good guide to the future.

From an economic growth perspective, more important than population is the size of the economically active workforce. Here the picture in Italy does not look nearly so alarming and offers opportunities. Projections from the United Nations indicate that Italy’s working age population in a decade would be around the level it was in the early 1980s – a time when Italy was a top growth performer in Europe.

Even that picture, however, understates the potential. Italy has the lowest female labour market participation rate in Europe at 61%. If female participation in Italy increased to the European Union average of 74% between now and 2030, the number of female workers would increase by about 300,000. If instead female participation in Italy reached Sweden’s 85% (the highest in the EU) over the same period, that number rises to 2m. Increasing participation would completely alter the trajectory of Italy’s labour force from one that is shrinking to one that is growing over the next decade (Figure 1).

Figure 1. Increased female participation dramatically affects Italy’s workforce trajectory

Italy working age labour force (age 20-64), millions of people

Source: Macrobond, United Nations, and PGIM Fixed Income

Productivity is another area where Italy could improve. Italy has had the weakest labour productivity growth in the EU over the last two decades (Figure 2). According to Istat, the level of education for Italian women is higher than for men and female education levels are rising faster than for men. The benefits to increasing female participation would therefore go beyond just increasing headcount and further improve productivity.

Despite these trends, the European Commission notes that Italy’s tertiary educational attainment rate is one of the lowest in the EU. A key policy lever would be to design policies aimed at increasing educational attainment for all to further enhance Italian productivity growth and bring it closer to the EU average.

Figure 2. Italy has third-weakest labour productivity growth in the EU

Real labour productivity per hour worked, annual average growth rate by country, 2010-19

Source: Eurostat

The combination of increased labour participation and productivity to EU levels by 2030 could contribute approximately 1.5 percentage points to Italian gross domestic product growth every year. This would more than offset the drag to growth from a declining population. Moreover, increased participation would raise tax revenues and, other things being equal, help to lower debt – an additional boost for chronic high debt in Italy. Increased revenues would alleviate trade-offs by creating more space for investment while supporting an ageing population.

Compared to Italy’s 0% average annual growth rate over the last two decades, these numbers would constitute a boom, rather than demographic doom, to Italian growth. The challenge is not the demographic change itself, but the policy response to it.  In the absence of policy evolution however, the outlook is much more gloomy.

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