Podcast Host: Hasti Rabiei
Guest: Hamzeh Arabzadeh

Hasti: Since the end of lockdowns and the reopening of economies in 2021, the global economic outlook has been anything but bright. Economic growth in OECD countries has stagnated compared to pre-pandemic levels. Then came the Russian invasion of Ukraine and the energy shock, followed by a wave of interest rate hikes to curb inflation. There has been constant talk of a looming recession, rising interest rates, and a potential stock market crash. Yet, amid all these negative indicators, something peculiar has been happening in advanced economies—labour markets have remained remarkably strong. In December, the average unemployment rate across OECD countries stood at just 4.9%, the lowest in decades. In half of these countries, the employment rate among working-age individuals has never been this high. This all suggests that in these economies, the labour market seems to be somewhat detached from broader macroeconomic conditions. What explains this unusual resilience?

Hamzeh: One of the main reasons behind this phenomenon is the aging population and the resulting labour shortages in these countries. To illustrate this, let’s take a look at Japan, which is an extreme case of a country grappling with an aging workforce. For decades, Japan has been suffering from a labour shortage due to its aging demographics. A lack of available workers means that replacing employees is costly and difficult for businesses. As a result, Japanese companies have historically been reluctant to lay off workers—even during economic downturns—because they know that hiring replacements later will be a major challenge.

The outcome is that Japan’s unemployment rate is much less sensitive to economic fluctuations compared to other OECD countries. For context, in the past 30 years, Japan’s unemployment rate has fluctuated by only about 3.5 percentage points, whereas in other wealthy nations, this fluctuation has averaged around 9.5 percentage points.

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Hasti: How does Japan’s experience relate to what’s happening in other OECD countries today?

Hamzeh: Many other wealthy countries—perhaps not to Japan’s extreme—are now facing similar issues with aging populations and labour shortages. Labour shortages across rich countries amount to roughly one million workers, which is about 1.5% of the current workforce. In some places, like Italy and the UK, the working-age population has even declined in recent years.

Of course, in addition to demographic aging, another factor has exacerbated labour shortages: the lingering effects of COVID-19. After the pandemic, a significant portion of the workforce—particularly older individuals—chose to exit the labour market entirely. So, beyond the long-term demographic trend, the pandemic itself has worsened labour supply constraints in these economies.

To better understand the connection between labour shortages and the reduced impact of macroeconomic fluctuations on employment, let’s go back to the lockdown period during COVID-19. During the pandemic, businesses laid off a large share of their workforce. But after the economy reopened, they struggled to find replacements due to labour shortages, making hiring a costly and time-consuming challenge.

Now, many firms seem determined not to repeat that mistake. They fear that if they downsize again, they will struggle to find workers later. So, much like Japanese companies, businesses in these economies are holding on to their employees—even if demand slows, even if interest rates rise, and even if a recession is expected.

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Hasti: If unemployment doesn’t rise during a recession, how does that affect economic cycles?

Hamzeh: When people don’t lose their jobs during a downturn, their incomes remain stable. That means consumer spending doesn’t drop as sharply, which helps soften the impact of recessions. In other words, if economic conditions have less influence on unemployment, then downturns become less severe. But there’s another side to this. When central banks raise interest rates to control inflation, a tight labour market keeps wage growth elevated. That’s exactly what we’re seeing right now—despite rising interest rates, the labour market remains strong, and unemployment remains low.

This, in turn, means that wages continue to grow, even though wage growth itself is a key driver of inflation. As a result, central banks may feel compelled to hike interest rates even further to bring inflation under control.

However, the deeper issue here is that low unemployment—while seemingly a positive sign—is actually a symptom of a much larger structural problem. It reflects a long-term labour shortage caused by demographic aging, a problem that is likely to worsen over the next decade. And this, in turn, will hurt the dynamism and productivity of these economies.

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Hasti: What solutions have Western countries pursued to address this issue?

Hamzeh: One key approach has been to facilitate the entry of foreign workers. Germany, for example, has actively pursued policies to attract skilled and unskilled labor from abroad. A major part of this effort has been its acceptance of Syrian refugees. By the end of 2021, Germany had taken in around 800,000 Syrian refugees, making them the largest refugee group in the country. Integrating such a large population into the labor market has been a complex process, but progress has been noticeable.

By 2021, about 50% of working-age Syrian refugees had found employment. Many initially took up low-skilled jobs in logistics, construction, and the service sector, but an increasing number have been transitioning into more stable positions, particularly in manufacturing and healthcare. The German government has made substantial investments in vocational training and language courses to support this integration. More than 75% of Syrian refugees had participated in government-funded language programs, and many younger refugees had enrolled in vocational training (Ausbildung) programs, helping to bridge skill gaps in the labor market.

Despite these efforts, challenges remain. The unemployment rate among Syrian refugees was still around 30% in 2021, primarily due to language barriers, mismatches in qualifications, and bureaucratic obstacles in recognizing foreign credentials. However, long-term studies suggest that after five to ten years, refugee employment rates tend to converge with those of other migrant groups, meaning we can expect further improvements in labor market participation in the years ahead.

Of course, immigration alone is not a perfect or universally accepted solution. It comes with political and social tensions, particularly in countries where public sentiment on immigration is divided. But purely from an economic standpoint, attracting foreign labor is a logical response to aging populations and labor shortages.

Another strategy pursued by several countries has been population policies aimed at encouraging higher birth rates. Some governments have introduced generous parental leave policies for both mothers and fathers, as well as financial incentives for having children. Countries like France and Sweden, for example, have long-standing pro-natalist policies designed to counteract demographic decline.

That being said, encouraging population growth to sustain economic expansion is itself a controversial idea, particularly from an environmental perspective. More people means more resource consumption, which raises concerns about sustainability. It’s a complex debate, and one that goes beyond just economics.

A third approach, and perhaps the most transformative in the long run, is automation. Many industries are increasingly turning to automation and artificial intelligence to replace labor shortages. Historically, there has always been fear that automation would eliminate jobs, particularly for lower-skilled workers. More recently, concerns have emerged that AI could displace even highly skilled jobs.

But what we’re seeing today suggests that these fears may have been overstated—at least for now. With labor shortages persisting, advanced economies may actually need more automation, not less, to compensate for the lack of workers. In fact, automation might become an essential component of economic adaptation, rather than a threat to employment.

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Hasti: What lessons can Iran take from this?

Hamzeh: Right now, Iran’s biggest problem is not a labour shortage. On the contrary, Iran suffers from a shortage of job opportunities. High unemployment and low labour force participation (especially among women) are clear signs of this. In fact, these years could have been Iran’s golden window for economic growth and development, given its abundant working-age population. Unfortunately, that opportunity is being wasted.

However, looking ahead, Iran will eventually face its own demographic aging problem, much like today’s OECD countries. This will likely happen in two to three decades, when the large generation born in the 1980s reaches retirement age.

Given the current financial struggles of Iran’s pension system, combined with low economic growth, weak investment, high unemployment, and low workforce participation, the country’s eventual aging crisis could be far more severe and destabilizing than what OECD countries are experiencing today.