What will the labour market of the future look like?

In an interview, IAB director Professor Bernd Fitzenberger discusses the challenges that will shape the German labour market in this decade. In addition to the digital and ecological transformation as well as demographic change, the impact of the Covid-19 pandemic and of the Russia-Ukraine war are further important factors.

What lasting effects will the Covid-19 crisis have on the labour market?

Fitzenberger: Undoubtedly, the Covid-19 pandemic has led to many negative but also some positive changes in the labour market. Some of these will be reversed after the crisis. However, the longer the pandemic has lasted, the more likely it is that behaviour, production, and work patterns practised during the pandemic will be maintained even after the crisis, if they make sense. Important examples are the increased use of remote work and video conferencing, the associated investments in the digital infrastructure, or the increased focus on health protection, for one thing, for employees, but also for customers.

It is to be expected that the crisis will further accelerate the processes of change in the economy and in the way we work. This may, for example, also affect the issue of more sustainable economic activity. Business travel will probably not be the same as before the crisis. Mobile working could make people less attached to their physical workplace and thus reduce commuting times and the demand for housing in metropolitan areas. In turn, the search radius for companies and employees will increase.

Digitalisation will shape the labour market of the future. How will this affect the qualification structure and income of employees?

Digitalisation – and also decarbonisation – will lead to considerable changes on the labour market. The number of jobs that will be lost and the number of new jobs that will be created may well balance each other out. However, the newly created jobs require specific qualifications, and the trend towards jobs with higher qualification requirements is generally continuing.

The trend towards jobs with higher qualification requirements is generally continuing.

As a consequence of the progress of digitalisation, even increasingly complex activities can be automated. The highest substitution potentials – also denoted as automation potentials – are still to be found in manufacturing and production-related occupations, the lowest ones in social and cultural service occupations. High substitution potentials also mean high productivity potentials and can open up better employment and earnings opportunities in the sectors concerned for employees holding jobs with a promising future. Appropriate training and further training of employees remains the central challenge in this regard. This is because the transformation process cannot be successfully managed without a higher participation in further training both by the employees and the unemployed.

As you already mentioned decarbonisation, another challenge for the labour market is the ecological transformation of the economy. Some fear, for example, that jobs will be lost if the pace of transformation becomes too fast. What is the IAB’s take on this debate?

A moderate “greening” of occupations can already be observed in today’s labour market. For example, the number of occupations with activities belonging to the field of environmental protection, so-called green tasks, increased by 16 percent between 2012 and 2016. Currently, 20 percent of occupations include such green tasks, for example, in the area of energy efficiency, although mostly still on a small scale.

20 percent of occupations now include green tasks.

The climate protection programme adopted in 2019 and the measures in response to the decision of the Federal Constitutional Court of 29 April 2021 will significantly boost the processes of change in the labour market. The switch from combustion engines will lead to job cuts due to the decreasing labour intensity in parts of the powertrain value chain. However, the establishment and foundation of new companies and the expansion of the e-mobility value chain will also create new jobs. Other alternative drive technologies – such as hydrogen – could also trigger other changes.

The task of labour market policy geared towards sustainability will be to actively support these processes of change, especially by way of further training or retraining. Another approach would be to build a financial bridge for employees having to transition from very well-paid jobs to less well-paid ones as a result of the transformation processes. This would be a contribution to a successful and socially balanced transformation. However, this should also be supported by further training in order to secure employment in the long run. This is a challenge because there is evidence that across the European Union so far green jobs pay on average less than grey jobs.

Demographic change strongly impacts the labour market. There are more older people retiring than young people entering the labour market. From the IAB’s point of view, what are the most important levers to mitigate this process?

To compensate for the increasing number of baby-boomers retiring from the labour market, demographic change requires that the still idle potentials of older people, women and refugees must be further activated for work. In order to increase the participation of women in the labour market, it is important to further expand childcare facilities, gradually limit mini-jobs and reform the joint taxation of the total income of married couples. In addition to this, further training and health protection are key to keeping especially older people in the labour market.

Recruiting skilled workers through immigration remains important as well. Immigration is a powerful lever to counter the consequences of demographic change. Other important instruments are the stabilisation and further development of vocational training, because there are still too many young people who do not obtain a vocational training degree. As a result of the Covid crisis, the dual firm-based training system has come under more pressure, the number of apprenticeships started has declined strongly. This was mainly due to the fact that there were fewer applicants for firm-based vocational training. The Covid crisis resulted in a high uncertainty among adolescents concerning the choice of training occupations. Many decided to stay longer in the school system, to start school-based vocational training, or to simply postpone the entry into the labour market.

There are still too many young people without a vocational training degree.

Just when the end of the Covid crisis seemed in sight, the next crisis began: the Russian attack on Ukraine. What does this mean for the economic development in Germany?

For the time being, the economic recovery predicted in the aftermath of the Covid crisis has been considerably slowed down by the war and the sanctions, by rising energy prices and increased supply bottlenecks. Certainly, one of the main problems is the sharp increase in inflation, which is hitting energy-intensive companies especially hard, the more so as price increases are also making imports more expensive. This could lead to declines in production, especially in energy-intensive industries, even if there are no gas shortages during the winter, as it seems likely to be the case based on the information available at this point. The observed decline in gas consumption so far is probably already partly due to production declines in the energy-intensive industries. These are particularly critical because they can trigger further negative economic consequences. This is because energy-intensive companies are mostly part of the primary industry and are thus typically high up in the supply chain. This could also lead to production cuts in the manufacturing sector. There is thus a high risk of a recession in Germany.

There is a high risk of a recession in Germany.

What does this mean for the labour market?

I expect that firms encountering economic difficulties will be more reluctant to hire. Also, short-time work is likely to increase for these firms. Depending on the depth of the recession, firm closures are likely to increase and their employees may become unemployed. Nevertheless, the labour market seems to me to be generally robust, supported by the tried and tested safeguards such as short-time allowance, even if the prediction of the future developments are currently very difficult. By the way, unemployment is also slightly increasing at the moment. However, this is mainly due to the fact that a growing number of refugees from Ukraine are entering the German labour market. In addition to humanitarian aid, we should therefore ensure the best-possible access to the labour market for refugees. Many will stay here for longer or perhaps forever.

Will unemployment still be an issue in 2030?

There will always be unemployment in dynamic labour markets because existing jobs are lost and new jobs are created, and because it takes time until job seekers and companies conclude new employment contracts. Beyond this inevitable frictional unemployment, there is the risk that even in 2030, the structure of jobs and job seekers will not match. Matching problems can be regional or based on qualifications. Training and further training, supporting regional mobility, but also promoting the employment of the long-term unemployed and creating jobs in regions with higher unemployment rates can reduce unemployment to a minimum. Implementing this successfully remains a challenge for labour market policy despite the high demand for labour.

DOI: 10.48720/IAB.FOO.20220928.01