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Saturday, September 29, 2007

The Economic Outlook In Ukraine

by Edward Hugh: Barcelona

Whoever, at the end of the day, wins the elections which are being held in Ukraine today, one thing is certain: they will have their work cut out, since Ukraine is a country with a very large accumulated set of problems, and of course, its size (in a European context) means that it is also a country which few (and especially those countries in the European Union) can afford to ignore.

What I will present below is a general review of the state of the Ukraine economy - which is at the surface level a lot healthier than many perhaps expect - but it will do this in a specific context, that of the inflation and labour supply problem which currently besets the emerging economies of Eastern Europe as a whole (and indeed see this systematic analysis of a very similar situation which exists in neighbouring Romania only last week).

Now earlier this year the World Bank published a very comprehensive report on the demographic future of Eastern Europe and Russia entitled "From Red to Gray - The Third Transition of Ageing Populations in Eastern Europe and the former Soviet Union". The key topic addressed in this report was the impact of long term low fertility on Eastern Europe's ageing labour force. The World Bank offered three policy remedies, more labour productivity, higher participation rates, and more migration.

If measures are taken to improve labor productivity, this would clearly outweigh the losses due to a smaller labor force. Output in aging countries can also receive a boost from increases in labor force participation through raising retirement ages and encouraging flexible forms of employment. And politics permitting, shortfalls in labor supply can be minimized by interregional migration.

The first of these is evident, but involves a fairly long term process to raise the education level and human capital content of the entire Ukranian population. It is the other two, the potential of increased participation rates and internal CIS state migration processes to resolve (or at least mitigate the problem) which will be examined here.

In this sense Ukraine may be considered to be rather an important strategic unit in the whole Eastern labour supply and demographic puzzle, since many imagine that as labour supply runs out across the whole region, then countries as diverse as the Baltics, Poland, Hungary, the Czech Republic and Russia may all . and at one and the same time - be able to leverage Ukraine's population reserve to help them out of their own difficulties. In this sense many live in the hope that outward flows from Ukraine may serve to plug a lot of otherwise increasingly evident holes in the East European labour force. My feeling is that the people who make this kind of projection for the Ukraine tend to forget three things.

1) The corrosive effect that long term lowest-low fertility across all the East European and many of the CIS societies is already having on the numbers of people who are becoming available in the labour market of these countries.

2) That large migrant outflows from one society to help meet the domestic needs of the labour market in another (Poles and Latvians in the UK and Ireland or Romanians and Bulgarians in Spain) produce significant labour shortages in the home (sending) country, shortages which when combined with rapidly growing domestic demand (and especially for new housing) - domestic demand which is fueled by i) globally available non-local-currency denominated cheap credit and ii) a steady and growing return flow of remittances from those abroad, then this whole process only serves to push up sending country wages very dramatically indeed, and potentially feed through to a loss of competitiveness which can make the whole external position of the country concerned (and with this the local currency, and the sustainability of the non-local currency denominated mortgages) very vulnerable indeed. Let's call this whole process - with no perjorative intention whatsoever - the Baltic syndrome.

3) That these sending countries, and in particular as a result of the processes detailed in (1) and (2), themselves start to experience fairly high rates of economic growth, and as a result they themselves start to need migrants. Ukraine is now a classic case of this process at work.

If we start to look at how all of the above is currently working out in the case of Ukraine, we find that:

1) The Ukraine economy has itself been growing quite rapidly in recent years (despite a slowdown in 2005). It grew at an annual rate of nearly 7% last year, and was growing at an annual rate of nearly 8% during the first six months of 2007.

This reasonably strong performance is also reflected to some extent in the annual rates of increase of industrial output.

And again the healthy tendency has continued throughout 2007.

2) As a result of this more rapid growth employment is growing moderately, but as a result of the ageing labour force unemployment is coming steadily down and was at 6.8% of the labour force using ILO criteria in 2006, while the number of those registering as unemployed in August 2007 was down to only 595,000. Wage inflation, on the other hand, was running at an annual rate of increase of 11.2% in the period Jan-Aug 2007 when compared with the same period in 2006.

What we can deduce from the above is not that people will stop leaving the Ukraine for the west - this is unlikely to happen, since the wage differential is just too large - but rather that the Ukraine economy will itself need to import labour if it wishes to continue to grow at the present rate. And this problem is real, and exists in the here and now, and is not a hypothetical situation set to arrive in 2025 or some other more-or-less-exotic date in the future. I am putting things this way as I imagine much of the above will come as some sort of surprise to many people.

So Ukraine is not a bottomless pit as far as labour supply goes, and the question is why?

Demographic Data

Firstly lets look at the Ukraine population.

As we can see the Ukraine population peaked in 1993, and has been in some sort of free-fall ever since.

Now there are a number of factors which lie behind this dramatic decline in the Ukrainian population, and one of these is fertility, which is currently in the 1.1 to 1.2 Tfr range. As we can see below, Ukraine's fertility actually dropped below the 2.1 replacement level back in the 1980s.

A second factor which influences population size is life expectancy, and in the Ukraine case the recent evolution of life expectancy has been most preoccupying, since it has been falling rather than rising. The chart below shows life expectancy at birth for both men and women, the male life expectancy is evidently significantly below the combined figure.

This situation is, as well as preoccupying, highly unusual (it is however paralleled to some extent in Russia itself). Apart from the obvious, the deteriorating health outlook which this data reflect places considerable constraints on the ability of a society like Ukraine to increase labour force participation rates in the older age group, and this is a big problem since this is normally though to be one of the princple ways to compensate to some extent for a shortage of people in the younger age groups.

The fertility and life expectancy situation described above is, of course, reflected in the relative size of annual births and deaths:

As can be seen the balance of birth and deaths, or natural rate of increase in the population without taking immigration into account, turned negative in the early 1990s. It is very hard to see how this situation can right itself, certainly at any point in the coming half century.

One of the key factors to think about in the economic context are the actual numbers of live births, rather than the more complex measures of fertility. In 1989 - which is the earliest year for which I have access to data - there were nearly 700,000 children born. By 1998 this number was near to 400,000 (ie a 40% or so drop in a decade). In practical terms (and if we take 18 as an average age for labour market entry in a country like Ukraine) then this year there are potentially 700,000 people to enter the labour force, while by 2016 this number will be only 400,000. Even if some of this loss can be offset by increasing labour force participation at the older ages this still implies a sharp rise in the average age of the workforce. This is just one of the reasons why fertility matters.

And in this context I am not optimistic about any large scale recovery in fertility in Ukraine in the forseeable future simply because of the comparatively low mean mothers-age at first birth which exists in the Ukraine. The reasoning behind my opinion here is explained in this paper: The path to lowest-low fertility in Ukraine, by Brienna Perelli-Harris.

According to Perelli Harris, although Ukraine has undergone immense political and economic transformations in the past decade, it has maintained a comparatively young age at first birth and nearly universal childbearing. Her analyses of official national statistics and the Ukrainian Reproductive Health Survey show that fertility declined to very low levels without a transition to a later pattern of childbearing.

That is to say - and for those of you who are familiar with the birth postponement process and the importance of the tempo-quantum distinction - the Ukraine still has a very low mean age at first birth by European standards (around 23 as contrasted with the West European average mean-age which is currently near to 30) and thus very probably has many more years of birth postponement (and with this a reduced number of recorded live births) in front of her. In other words Ukraine still has a long way to go in the current demographic transition, and as a result a real improvement in the birth rate may not be expected till average first birth ages have settled at a new, and much higher, level. We could be talking about a couple of decades here, at a rough guess.

So even if, as we can see from the above graph, there has been a small increase in the number of births in the last few years, it is hard to attach any real importance or significance to this. In large part fluctuations in annual birth levels during epochs of substantial postponement are shadows of earlier fluctuations in the level of annual births, fluctuations which are now reflected in the numbers of potential mothers.

On the other hand, and as I have noted above, while Ukraine has one of the lowest fertility levels in Europe, it also has one of the highest death rates. In 2000, for example, the death rate reached 15.3 per 1,000 as compared with a 10.6 per 1,000 average rate for the countries of the European Union. Between 1991-2000 an increase in the death rate was recorded in practically all age groups (with the exception of the 1-14 age group), but this increase was especially pronounced among working age males. The death rate for the working-age group grew by a factor of eight in the years between 1991 and 2000, and the portion of the overall death rate which came from the working age group reached almost twenty-five percen.

In all but the oldest-old age groups the death rate for men significantly exceeds the death rate for women (and in some cases by a multiple of two or three), but the difference is especially noticeable in the 30-45 groups - ie in ages which still fall within the boundaries of the reproductive age.

The Ukraine and Migration

The third factor influencing population dynamics is obviously migration.

We can break the evolution of migration in the Ukraine context into three phases. The first of these covers the period of 1991-1993, the second runs from 1994-1998, while the third started in 1999 and is ongoing (I owe this classification to the work of Olena Malynovska, see reference below).

The first phase followed the break-up of the old Soviet Union and was characterized by massive migratory movements - or so-called stress migration processes. During this phase, there was a strong migratory surplus into the Ukraine.

Such migratory growth was primarily driven by Ukrainians who wanted to live in their own country and who were repatriating themselves from the North of Russia, the Far East and Kazakhstan, as well as repatriation of those previously subject to repression and exile such as the Crimean Tartars. In the forefront of this was a large influx of both Ukrainians and indigenous population fleeing conflicts in Central Asia and Transcaucasia. To give an example of the very large migratory surplus in 1992 60% were ethnic Ukrainians.

On the other hand among emigrants ethnic Ukrainians constituted only 37.7 % of the total in 1991 and 28.8% in 1992.

The second migratory phase -1994 - 1998 - was characterized by a very sharp reduction in the inflow to Ukraine from former USSR republics and a steady increase in the volume of outflow which lead to a migratory deficit in Ukraine of 91,600 in 1994. Altogether, over five years, more than 900,000 people migrated from Ukraine to CIS and Baltic states, whereas only 630,000 immigrated into the Ukraine. This is undoubtedly a reflection of the serious economic crisis which took place in the Ukraine during this time.

The vast majority of Ukrainian emigrants at this time went to Russia (636,000 people in five years or 70% of those who went to the post- Soviet countries), since the economic situation there was better, wages and the standard of living higher and entrepreneurial conditions more favorable. Only 270,000 people arrived from Russia, i.e. the migratory deficit caused by migration to Russia in 1994-1998 was about 366,000.

This whole position can be clearly seen in the chart below which comes from the research of Olena Malynovska (full reference below).

And the specific situation vis-a-vis Russia can be seen in this chart, which comes from data supplied by Pirozhkov and Safarova (see full reference below).

The volume of population migration between Ukraine and the CIS and Baltic states has decreased significantly since the turn of the century according to the official statistics that register changes of residency. Thus in 2002, the volume of gross-migration was only one eighth of that registered in the early 1990s. This transition is also clearly reflected in the Ukraine official migration statistics which form the basis of the following chart.

The third phase in the migratory process began around 1999 continues today. This phase is distinguished by less intensity in the migratory process itself (to date) but also by a significant change in destinations. From migrating East the Ukranians are now moving West. Data on this latter movement has not been systematically collected but we have some national data on Ukranians in Portugal, Spain and Italy, and lots of anecdotal information about Ukranian migrant workers in Latvia, the Czech Republic, Poland and elsewhere in the EU 10.

According to information provided by Ukrainian diplomatic missions, 300,000 Ukrainian migrants may be working in Poland, 200,000 each in Italy and the Czech Republic, 150,000 in Portugal, 100,000 in Spain, 35,000 in Turkey, and another 20,000 in the US. According to official information based on the number of permits issued by the Russian Federal Migration Service, some 100,000 Ukrainian citizens currently work in Russia, although the real number of Ukrainians working there is often estimated to be more in the region of 1million.

According to information provided by one Portuguese charity which specifically studies Ukrainian migrant workers, the largest number of Ukrainian migrants are currently working in Russia, at more than 1mn, 500,000 are working in Italy, 300,000 each are working in Portugal and in Germany, around 200,000 are employed in Great Britain, more than 150,000 each are working in France and Spain. Significantly less, but still large numbers of Ukrainians are working in Greece, Turkey and Israel—Greece and Turkey account mostly for seasonal workers—, and smaller numbers work in Northern Europe, the Baltics and the Middle East. (cited in: Andriy Kyrchiv, Labor Migration and National Security in Ukraine - in Ukranian)

This new era of Ukraine outmigration has also been accompanied by a shift in the source countries for in-migration. According to this paper (Popson, 2004, full reference below), which deals exclusively with Kyiv:

In the early 1990s, migration patterns in Ukraine were dominated by repatriating Ukrainians and Russians, Kazakhs, and other Soviet nationalities departing to their titular states. By mid-decade the makeup of migrants began to shift. Although the Ukrainian economy provided few incentives for migrants from the former Soviet Union, migrants from ethnic groups who had not historically resided in Ukraine continued to arrive, and in larger and larger numbers. These migrants came from Asia, Africa, and the Middle East; they arrived through legal, semi-legal, and illegal channels; and they were often on their way to Europe or other destinations. As Ukraine’s borders with Eastern Europe and the European Union solidified, it became more and more difficult for migrants to cross into Europe, and many found themselves in Ukraine for the medium to long term.

Serhiy Brytchenko, the head of the Presidential Administration’s Migration Directorate, published an article in Uryadovyy Kuryer on increasing migration trends in Ukraine. According to Brytchenko, the number of people adopting Ukrainian citizenship in 2004 was far greater than those relinquishing it: in the first six months of the year, the number of people granted Ukrainian citizenship rose 40 percent over the same period in 2003, and by 180 percent in comparison to 2002.2 The article by Brytchenko echoes research conducted by sociologists in Ukraine suggesting that many of these migrants are now seeking permanent residency in the country. While they may not have originally chosen Ukraine as their final destination – either they were in transit further north and west or were simply seeking a safe haven away from political and economic strife in their home countries – they now consider themselves part of Ukrainian society. They are working in Ukrainian markets, sending their children to Ukrainian schools, using Ukrainian state services, and purchasing Ukrainian goods.....

According to official statistics, in 2001, 101,268 foreigners were registered with the Ministry of Internal Affairs in Kyiv. These include foreigners with permanent residency status on business and work permits, students in the city’s colleges and universities, refugees and asylum seekers, and illegal migrants who have been identified by the city’s law enforcement agencies. These figures surely miss a number of illegal migrants who have escaped the notice of city authorities. According to estimates of social scientists working on migration in Kyiv, approximately 15,000 of these foreigners represent ethnic groups that were not present in Soviet times – in particular migrants from Africa, Asia, and the Middle East.
Kyiv is a microcosm encompassing many of the issues created by new migration trends in Ukraine. Changes to the city’s functions (from capital of a Soviet republic to capital of an independent nation) and the consequential shifts in legislation and jurisdiction of particular agencies left an opening for migrants to find their place in the city. The development of a robust shadow economy provided space for immigrants – even those with incomplete or no documentation – to find accommodations and employment. Ukraine’s willingness to accept immigrants and refugees and to offer them many of the same rights as citizens also made Kyiv a welcoming home for many. Added to this, Kyiv has become an important transit point where international routes for the transportation of illegal migrants from Asia and Africa intersect.

The issue of migrants in Ukraine’s cities and towns is an interesting avenue of research for those looking at civil society development. In Kyiv alone there were nearly 500 national and regional ethnic cultural associations who were active in 2000.

However, as well as the flow of migrants into Ukraine who decide to stay, we can also identify another group of migrants who enter Ukraine, and those are the transit migrants. These are normally destined for points further west. According to the Ukraine-based International Centre for Policy Studies(see reference below) the ethnic composition of transit migrants has also been shifting in recent years. In 2003, the majority of transit migrants were Southeast Asian and African nationals. Today, the majority of transit migrants are CIS nationals. Most significant among these are Russian nationals of Chechen origin, Moldovans, Georgians, Uzbeks, Azeris, and Armenians, accounting for 70% of total numbers of detained illegal migrants.

What we can see, is that the numbers of Ukranians currently working outside their country is large, and as the labour market needs of the receiving countries increase this number will undoubtedly rise. The numbers of those now arriving may also be large, but possibly not as large as those who are leaving. This finding (and there are of course questions about the level of accuracy of all the data we have) is consistent with the very tight labour market position which we are now about to examine. As we have seen in Latvia, Poland, Romania etc, this whole process is very dramatic for the countries concerned (and not least of these for cultural reasons) and the stability and sustainability of everything which is happening (and so fast) must be under question.

Changing Population Age Structure

One additional obvious consequence of the low fertility and substantial outward migration which Ukraine has experienced has been a slow but steady rise in the median age of the Ukraine population:

At just over 39, this is not especially high in comparison with elderly societies like Japan, Germany and Italy (median age circa 43), but it is very high when you consider the state of economic development in Ukraine, and when you consider the comparatively low life expectancy. This is another of the "details" about Ukraine's demographic and socio-economic evolution which worries me deeply, and if you are not really at all sure why the issue of median ages should matter to economists, well you could try this post here.

Obviously such diversity at the level of key demographic indicators leads directly to divergence in terms of the comparative population age structures. Ukraine has a very low proportion of young children (for Ukraine in 2003 this group was only constituted 15.8% of the entire population) and a quite high proportion of elderly people(the over 65s constituted 21.3% of the total population in 2003).

Nowhere is this problem clearer than when we come to look at the 25-44 age group as a percentage of total population. This group is critical since in many senses (credit acquisition, home establishment, productive prowess) it is the group which carries the economy on its shoulders.

Now this data is very, very strange. In the first place after peaking in 1994 the group hovers around the 28% mark (you need to go into decimal points to see the changes) and secondly the level at which it peaks (28.95), since this is extraordinarily low. If Ukraine had had a more "normal" population evolution this figure should have been four or five points higher (say 33/34%). This gives a measure of Ukraine's lost population, and of the wealth creating capacity which has gone with it.

Labour Shortages and Wages

Ok, so now lets have a look at some of the consequences of these structural distortions in the demographics. Let's start with the labour force.

So as we can see the numbers of those employed has steadily increased, while the size of the economically active population is steadily dropping. This has its direct reflection in the unemployment data. Here are the unemployed as a % of the economically active population.

There is nothing especially spectacular to note about the above data, except that the total numbers of employed persons does not rise enormously, moving only from 20,270,000 in Q1 2005 to 20,537,000 in Q1 2007. Thus despite the fact that the Ukrainian economy is growing steadily, employment is not rising to anything like the same extent, at least as far as the official sectors of the economy go. In part this may (hopefully) reflect some sectoral shifts, and some consequent increase in productivity as people move from less productive to more productive sectors in terms of value added. ( Of course it would be really, really nice to have a comparative skills balance sheet on this). But the lack of new job creation must also in part reflect the labour market tightening - and hence wage inflation - that is taking place inside Ukraine itself. Wage levels - at least from the official data - seem to be rather volatile, but the trend is undeniably up, and seems to be running at an annual rate of increase of around 20% this year. Meantime the number of those who are unemployed heads steadily down.

An idea of the velocity of this decline in the numbers of unemployed can be gained from the next chart which shows the monthly change in the numbers of unemployed for 2007. I have used the numbers registering with the employment agency as unemployed for this chart as there are, as in the case of most Eastern European countries, difficulties in getting through to the true meaning of the regular unemployment statistics. Still, this is a measure, and does give some indication of the tightening which is taking place. Total numbers of registered unemployed have fallen now from 790,000 to 595,000 in just seven months. At this rate of expansion Ukraine will run out of labour serviceable labour soon, very soon.

Wage Costs

The impact of this rapidly tightening labour market in Ukraine is, of course, not hard to predict: wages have been rising rapidly. Here we can see the rapid rate of wage inflation which there has been in Ukraine over the last few years.

And here's a chart showing the monthly rate of wage inflation since February 2007 (percentage increases in comparison with the same month in the previous year). As can be seen, the rate has been accelerating since May as the labour market has steadily tightened.

Now one solution which is often advanced to this kind of problem is to try and raise the level of labour market participation (See the from Red to Grey World Bank report). So let's take a look at the Ukraine labour market participation rates for different age groups. First for males.

As can be seen the rates of participation in the core age groups are already very high. Even in the 50 to 59 age group they are up around 70%. The only male groups where more workers really could realistically be found are in the 15 to 24 group, and in the 60 to 70 one. But a number of things need to be said here. Firstly, male life expectancy at birth in Ukraine is only around 63, and while life expectancy at 60 is likely to be somewhat higher this age group generally (at least for males) are hardly likely to be "hail and hearty" so I think it is unrealistic to imagine we can see a large number of extra workers coming from this group.

If we look now at the 15-24 age group, it is important to bear in mind that this is a comparatively small cohort of people. In total this year there are around 7.25 million. Around half of these are males. This gives about 3.6 million, and 40% of these are already working. So we are down to around 2 million males in this group not working. But many of these people are in school, or tertiary education. So at a really optimistic guess you could find another half a million people here if you really tried. But the Ukraine labour market appears to need 200,000 extra people every six months, judging by the recent reduction in unemployment. Now obviously these are just very rough and ready back-of-the-envelope calculations, but they are simply to give an indication of the of the magnitude of the problem and the realism of those who simply talk about increasing participation rates without looking at the reality which lies behind the surface in a country like Ukraine.

Now let's look at the female rates:

Well, across the board these are rather lower than in the male case, but even in the female case the central core age groups have reasonably high participation rates by international standards. There is of course the 15 to 24 age group, but I think here we need to remember, apart from the fact that many young Ukranian women want and expect a reasonable education just like their male counterparts, that Ukranian women still have children comparatively early (around the age of 23) and hence we need to be coherent here. In the longer term the future of the Ukraine rests on having more children, so we should not be simply eating the seed corn now by trying to extract the maximum levels of young female labour force participation, we should be dynamising policies which make it easier for them to have children.

So we are left with women in the 50 to 59, and 60 to 70 age groups. This is fine - although do remember that some of these will have responsibilities as grandmoms if you want a higher proportion of the young mothers to be out working, so even here there are limits, and again being realistic, it is hard to see the white heat of the new technological revolution being brought to Ukraine by a group of poorly educated Ukranian women in their sixties.

The Current Outlook

Well, as I said at the start, the Ukranian expansion is thundering along at the moment on the back of a major global expansion in the demand for steel. This is producing a consumer boom, which is reflected, for example, in the rate of expansion in retail sales this year. These, as can be seen below, have also really been thundering along at a huge monthly year on year rate.

One of the factors which has been fueling this consumer boom has been wage inflation, another has been worker remittances, which have been increasing steadily in recent years. Here is some data which is now provided by the National Bank of Ukraine, but it should really be borne in mind here that these numbers can only be taken as an indication since the actual level is undoubtedly much higher. The Polish National Bank, for example, has actually, following all the notoriety which the "Polish in Britain" phenomenon has created started to make a pretty serious attempt to compile accurate data. According to the World Bank Poland has measured 785 million dollars in remittances for 2006. The Ukranian National Bank only estimates 34 million. Even accepting that many Ukranians are still in Russia and on Russian wages, can Ukranian labour be worth that much less than Polish labour, especially when we take into account the number of Ukranians in Italy, Spain, Portugal etc. Even little Moldova manages to find $85 million coming in in 2006.

Apart from helping generate a mini construction boom (12.7% annual increase in construction activity Jan to June 2007 over the same period in 2006, and again where are the workers to come from to do all this specialized work), this consumer driven boom is creating imbalances in Ukraine's external trade as imports are rapidly sucked-in to satisfy all the extra domestic demand. The Ukraine trade balance has, in fact, steadily deteriorated since the end of 2004.

As can be seen from the monthly balance for 2007 below, this situation has continued as the year has progressed, and in some ways even deteriorated.


I would like to close this post by stressing a number of basic points. Basically there is a danger here of interpreting what Claus and I are saying about the whole labour market situation across Eastern Europe in a very crude fashion, and we are anxious that people do not do this. The rate of labour market tightening (and hence inflation) across all of Europe's economies depends in part on available labour. This affects those in the EU (like Ireland, the Uk, and Spain) just as much as it does those who are outside (like Russia, Croatia, Ukraine etc). The extent to which this tightening (and hence the wage inflation and the exhaustion of reserve pools) occurs will depend on two things. Firstly it depends on the rate of economic growth, and secondly on the rate of sectoral transition to higher value activities.

Both of these are semi-independent variables which cannot be predicted from simply looking at population numbers and fertility. But they are only semi-independent, since lower population levels and ongoing low fertility (ie over 20 years or more) do have an impact on the relative price of labour. This impact that the combined effect of this double whammy has is to slow growth, and to encourages a transition to more capital intensive activity (as labour becomes more expensive). It should miss no-one's attention that just this sort of discussion is already taking place inside China, as people begin to worry that the cheap labour intensive product era may be coming to an end as labour market tightening begins to have an effect even there (and here).

So the both the immediate and the long term future for Ukraine look none too promising, and fraught with difficulty, from a demographic point of view. Especially when the majority of influential international agencies seem to ignore the fertility component in this problem.

The World Bank has published another report on the EU10 economies just this week, and they are very aware of the growing difficulties represented by the evident labour shortages which are occurring. Here is just a short extract to give an idea:

Unemployment has fallen substantially in virtually all EU8+2 countries since 2004 due to strong growth in labor demand. This has given rise to skill shortages and associated wage pressures, often amplified by out-migration of EU8+2 workers. However, employment/working age population ratios remain relatively low.

Addressing the emerging skills shortages is particularly important, because failure to do so will constrain job creation and future economic growth. To increase the effective labor supply EU8+2 countries need to: (a) improve labor supply incentives through reforming the social security systems, (b) improve worker skills through reforming the educational systems and improving domestic mobility; and (c) import labor with skills that are in short supply by opening labor markets to foreign workers.

There is much that constitutes sound sense in this report, although as I have already indicated it is not clear that labour force participation rate increases can do as much work in a country like Ukraine as they seem to imagine. What I found hard, very hard, to understand is why nowhere, but nowhere, in the whole report is the issue of doing something about the severe underlying fertility problem even mentioned.

Data References

International migration in contemporary Ukraine: trends and policy , by Olena Malynovska, October 2004

Demographic development of Russia and Ukraine: fifteen years of independence
Sergei Pirozhkov and Gaiane Safarova, 2006

Migration in Ukraine and the Case of Kyiv: Suggestions for Preparation of a Research Agenda by Nancy Popson, Kennan Institute (Washington, DC)

Ukraine’s Policy to Control Illegal Migration
, International Centre for Policy Studies (Kyiv, Ukraine) and Institute for Public Affairs (Warsaw, Poland), June 2006.

National Bank of Ukraine

The Ukraine Statistics Office