Countering the demographics-driven loss of prosperity

The population is ageing fast. Life expectancy is rising, while the birth rate is falling. The proportion of the European population that is able to work is expected to fall by nearly a third by 2100, with detrimental consequences not just for the labour market but also for general prosperity.

Switzerland, and within it the Canton of Zurich, are not immune to the impact of an ageing population either. In the next few years, we are likely to see a worsening of the skills shortage, heightened financial pressure on old-age pensions and social security schemes, and rising healthcare and nursing costs. At the same time, demographic change is also jeopardising the steady increase in prosperity to which people in the canton have become accustomed. Failure to take action will leave it facing a growth gap of almost CHF 50 billion in 2050 compared to its trajectory to date, equating to a drop in economic output of about a fifth. The GDP gap would amount to around CHF 600 billion by 2050.

This impending slowdown in growth can be averted, however, with three levers capable of narrowing the gap or even closing it entirely:

• Labour intensity: The higher the labour intensity, the more work is being done, either by those already in gainful employment (e.g. by working more hours) or through mobilisation of those who would otherwise be outside the labour market.
• Labour productivity: Higher productivity means that those in gainful employment are generating more value per hour worked than they were before. Higher productivity growth automatically means that not as many people need to be in gainful employment.
• Age structure: A change in the population pyramid, such as a rise in the percentage of younger people, will increase the labour potential (assuming an unchanged employment rate).

Looking at each lever in isolation, it is clear from the model how much effect each would need to have in order to close the GDP gap completely by 2050.

What will it take to close the gap?

• As far as labour intensity is concerned, the employment rate would need to rise continuously between now and 2050. Workloads would need to increase from their current average of 84 per cent full-time equivalent (FTE) to around 90 per cent FTE over the same period.
• Meanwhile, labour productivity would need to grow by roughly 1.2 per cent per year – four times faster than over the past 25 years – to close the GDP gap in absolute terms as it stands in 2025.
• With regard to the age structure, there will be a shortage of about 300,000 working people, preventing the GDP gap in absolute terms from being closed by 2050. The only ways to influence these numbers would be by raising birth rates or increasing immigration (i.e. having rising net migration).
• However, a higher birth rate takes about 20 years to have an effect, and it would need to rise sharply – a major challenge, given the Canton of Zurich’s current figure of 15,000 births a year.
• Net migration in Switzerland has stood at around 79,000 people a year over the past five years, 17,000 of whom have found a home in the Canton of Zurich. With the populations of neighbouring countries ageing too and the Swiss Federal Statistical Office forecasting a fall in immigration, net migration is unlikely to make as big a contribution as it has to date.

Shining a spotlight on ten measures

Politicians and business leaders have various ways to influence these three levers. The study discusses ten specific measures in detail and evaluates them in terms of two criteria: impact and cost. Impact describes how much of an effect the measure in question will have on pulling the lever and thus narrowing the GDP gap. It is set against the cost of implementing the measure in each case .

Increasing labour intensity

Government measures have the potential to boost labour intensity by increasing either the number of people in gainful employment or how many hours they work. The focus here is on three key approaches: gradually raising the retirement age, targeted tax incentives for employment and expanding funded childcare. Businesses can also help to improve labour intensity, such as by reviewing their restrictive ‘zero-gap’ recruitment policies. Studies have shown that offering financial incentives to push up the birth rate or increasing funding for childcare will only do little to close the GDP gap in the Canton of Zurich relative to their high cost.

Boosting labour productivity

Labour productivity can be boosted through improvements to the underlying government framework and targeted measures at individual company level, with advances in technology – most notably AI – having a key role to play. AI harbours significant potential for closing the GDP gap, especially in the Canton of Zurich with its strong services sector. The Organisation for Economic Co-operation and Development (OECD) is expecting AI to boost the productivity of countries like Switzerland by between 0.5 and 0.9 percentage points over the next ten years. A streamlined government framework and the rapid adoption of AI by businesses and public administration will also be crucial to realising productivity gains and staving off the looming prosperity gap.

Although small and medium-sized enterprises (SMEs) are the backbone of the Swiss economy, they are lagging behind their larger counterparts in the digital transformation stakes. Experience from other countries suggests that targeted, readily accessible funding schemes make SMEs more competitive and inject major growth momentum. This has the potential to narrow the digital chasm between SMEs and big companies, strengthen Switzerland as a place to do business, and reduce the growth gap that is forecast to affect GDP and the size of the employed population between now and 2050.

Changing the age structure

There are two ways to shift the age structure in favour of a younger population: either by increasing the birth rate or by increasing migration. The study focused on two measures, namely upping the financial incentives to start a family and simplifying the quota rules for skilled workers from third countries.

Using financial incentives to increase the birth rate would have only a limited impact. Maternity grants and child allowances that were introduced in Switzerland in the past merely resulted in a slight uptick in the fertility rate that, in any case, lasted only a few years. Experience from other countries also confirms that financial incentives are not enough on their own to bring about a lasting increase in the birth rate. Higher birth rates cannot solve the problem of an ageing population in the short term either, as it will take about 20 years for the children born today to enter the labour market.

Although simplifying the quota rules for skilled workers from third countries offers only limited scope compared to making better use of the potential already in the country, it could generate tangible added value for some of the sectors affected. Higher quotas are unlikely to have a meaningful impact in the short term, because they have not been fully exhausted since 2019. If the skills shortage were to worsen or immigration from EU/EFTA countries were to fall, however, they could exert a positive effect. Greater benefits are to be had by harmonising and digitalising admission processes and using AI, as these measures would shorten processing times and reduce the administrative burden.