With ultra-low fertility rates and high death rates, Ukraine will experience the single largest absolute population loss in Europe between 2011 and 2020. Although the resulting labour shortages will push up real wages and thus benefit consumers, lower competitiveness and output will adversely impact the country’s long-term economic growth.
Population Growth Index in Selected Eastern European Countries: 1990-2020
Source: Euromonitor International from national statistics/UN
- Falling disposable incomes and the closure of many childcare facilities after the collapse of the Soviet Union in 1991 had made it increasingly unaffordable for many Ukrainian families to have more than one child. As a result, Ukraine’s fertility rate had been falling throughout the 1990s, reaching an all-time low of 1.1 children born per female by 1999. Although improving economy saw the fertility rate climb back to 1.4 by 2011, this is still significantly below the replacement level of 2.2. Meanwhile, Ukraine’s death rate is the highest in Europe, at 16.1 per 1,000 inhabitants in 2011, significantly higher than its birth rate of 10.5 per 1,000 inhabitants for the same year;
- Although other European countries, including the Baltics, are experiencing similar demographic trends, it is the size of Ukraine that makes this decline so drastic. Between 1991 and 2011 the Ukrainian population decreased by 11.8%, from 51.6 million to 45.5 million. Falling population has brought with it dire consequences for the state budget and economic output.
Low fertility rates in Western Europe are often associated with an ageing society. However, this is not the case in Ukraine:
- High death rates due to smoking, accidents at work and high incidence of suicides affect men in particular before they reach the age of 65. In 2011, life expectancy at birth in Ukraine was only 69.5, compared to 78.6 in the EU;
- The old-age dependency ratio (the percentage of persons older than 65 per persons aged 15-64) actually decreased from 23.3% in 2006 to 21.7% in 2011. During this period, population aged 65+ fell by 8.1%, from 7.6 million to 7.0 million.
The biggest challenge for Ukraine is the tightening of the labour market with repercussions for economic growth:
- The Ukrainian economy was already experiencing a severe labour shortage before the global slowdown in 2008. At its peak of 7.9% annual real GDP growth in 2007, the unemployment rate was 6.4%, but this was mostly due to a mismatch in supply and demand for skills. Whereas in 2000 there were 17 people chasing after every vacancy, by 2007 this went down to only four, according to national statistics;
- Ukraine has reversed a long trend of being a source of migrant workers, as the country recorded positive net migration between 2005 and 2011. This means that Russia and Poland will find it increasingly hard to plug their labour shortages with Ukrainian workers;
Employed Population and Net Migration in Ukraine: 2001-2011
Source: Euromonitor International from national statistical offices/UN/ International Labour Organisation
- Although the global economic slowdown saw Ukraine’s real GDP plummet by 14.8% year-on-year in 2008, annual real growth rebounded quickly, reaching 4.3% in 2010 and 4.7% in 2011. However, labour shortages will make it difficult to return to pre-crisis growth.
Consumers have benefited from wages rising sharply as a result of labour shortages:
- Monthly wages grew by an average 13.1% year-on-year in real terms between 2001 and 2011 (data for 2011 refers to the first three quarters) according to national statistics. Real annual disposable income per capita grew by 208.6% in the same period;
- However, higher wages have made Ukraine less competitive, so unless it moves toward higher value added activities, economic growth will slow down.
In 2006, the government adopted the Strategy of Demographic Development of Ukraine to the Year 2015, which focuses on improving the living standards of young families. However, it is unlikely that the trend of declining births will be reversed, as the effect of postponement (a Western trend of fewer children born to older mothers) locks in:
- By 2020, the population aged 65+ will rise to 7.6 million, from 7.0 million in 2011 whilst the population aged 0-64 will fall to 35.9 million, from 38.5 million in 2011. In particular, the population aged 15-64 – the biggest contributors of income tax – is expected to decrease by 9.5% during 2011-2020. A shrinking labour force combined with an ageing population will weigh down on government spending;
- In an effort to relieve pressures on government expenditure, in July 2011 the Ukrainian government raised the female retirement age from 55 to 60 and the male retirement age of from 60 to 62. However, in the context of a rapidly declining total population, this is unlikely to address the problem of labour shortages and falling economic output in the medium and long term.