How similar are the countries in the European Union?

With the possibility of Britain leaving the European Union, there has been a lot of attention given to the advantages and disadvantages of such an action.  Clearly such debate benefits from being based on good information and to contribute to that debate Global Demographics’ Insight for March 2016 is a summary demographic profile of 22 of the 28 countries in the EU.

The objective of this paper is to give the reader a succinct profile of some of the key demographic and economic characteristics of the countries currently in the EU.

The Demographics

The two obvious demographic variables to look at are the size of the population of the different countries and their age profiles.  Figure 1 shows the countries listed by total population as estimated for 2015. The difference on this variable is considerable.  The largest is Germany at 81 million and the smallest is Estonia at 1.3 million (equivalent to a small German city!).  The pattern in the chart also shows a dichotomy.  Of the 22 countries included, 16 have a population of less than 20 million and 6 are above that figure.  In fact, those six dominate the overall population of the EU, accounting for 72% of the total population of these 22 countries.

The second key variable to look at is age profile, and here it is interesting to note that the difference is not that great.  The countries are ordered from that with the largest proportion of its population under 25, to the smallest.  As is evident from Figure 2, the overall difference is small and not particularly meaningful in terms of causing different population outcomes in the future.

labour force

The Labour Force Relative to the Population

Given the considerable difference in total population size it is not useful to compare size of labour force as that is significantly a function of total population size.  It is however, useful to look at some of the component measures of employment.

The first of these is the number of dependents per employed persons.  This is an important measure as it does give some indication of the money that is available per capita in the household.  The lower the number of dependents per worker the more there is to spend per person in the household.  Figure 3 shows the range of the countries on this variable.  Basically whereas every Greek worker is supporting 1.9 persons in addition to themselves, at the other extreme the average worker in the Netherlands is supporting themselves and one other person.  The implications of this for the spending pattern of individuals in these two countries is considerable. 

The other employment measure is the proportion of the labour force that is female.  In this respect there is a very high degree of consistency (relative to global variance).  As shown in Figure 4, females are marginally underrepresented in Greece, Italy, Czech Republic and Spain, but for all others the range is from 45% to 50%.

Effectiveness of the labour force

Productivity of the labour force is a critical measure as it determines household incomes and hence consumption and also the overall wealth of the population (GDP per capita). The best measure of productivity is the simple one of total real GDP divided by the number of employed persons. This is less able to be manipulated than other more ‘refined’ measures.  Figure 5 (below) shows the distribution of the countries on this – and the difference is considerable.  Basically the countries that might be classified as Eastern European are significantly less productive per worker than those in Western Europe with Greece, Spain and Portugal being the ‘bridge’ between the two groups.  It is not shown in this paper, but it is worth noting that there is an almost 1 to 1 correlation between the order in terms of GDP per worker and the order in terms of average wage per worker and hence, ultimately, household incomes (subject to the number of workers per household).

Figure 6 is a possible explanation for these differences. It shows the accumulated Fixed Capital Investment per worker.  This is the Fixed Capital Investment of the previous 10 years depreciated at 10% per annum and summed. It is a proxy measure of the resources available to each worker (including efficient transport systems, power, tools, etc.) which can enhance the worker’s productivity.

While it is not a perfect correlation, there is a notable similarity in the order of the countries on the two measures.  The obvious exception is the United Kingdom where Accumulated Fixed Capital Investment is significantly lower than one would expect given its relative GDP per Worker.  This may reflect the fact that the UK economy has a very significant service sector (Bank and Finance in particular) which actually have a low capital requirement.

Finally, in this Insight it is important to look at what is happening to the size of the labour force.  This is a function of the proportion of the population that is working age (defined as 15 to 74 years of age) and migration.  Here there are quite dramatic differences which, given that number of workers multiplied by productivity per worker defines total GDP, has significant implications for the future relative growth of these economies.  A significant number of these countries are projected to experience a decline in the number of workers in their economy.  Analysis indicates that this is largely a function of migration and given that migrant workers tend to be the more skilled (who can get jobs in other countries) it must have implications for overall productivity as well.  Basically this variable indicates that the less affluent countries are losing their key resource – skilled workers.  This in turn will inhibit their ability to grow in affluence.

The Implication for Companies and Investors

Quite simply, the EU is made up of a quite diverse group of countries in terms of size of population, accumulated fixed capital investment, trend in labour force size and productivity (GDP per worker).  However, they are remarkably similar (compared to global variance) in terms of age profile and gender participation rates in the workforce.

Perhaps the most disturbing issue is the trend in labour force size.  Many of the smaller and less affluent countries in the EC are losing workers to the higher paying economies (which typically have greater accumulated fixed capital investment per worker and hence enhanced productivity).  While it is good for the more affluent countries in terms of getting an increasing supply of more productive workers, it is clearly bad for the countries these workers are moving from.  Not only do they have fewer workers, but they are probably losing their more productive ones. 

The desirability of free movement of labour may not be quite the ‘plus’ that it is made out to be.

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