We need to look beyond the traditional definition of working age as being between 15 and 60 to 64, and boost participation in the workforce by those over 65, he said today in a speech in Paris at the OECD.
“As demographic headwinds bite, finding ways to boost labour force participation and productivity becomes even more important as a driver of economic growth,” he said. “Despite this, policy reforms to structurally raise participation rates in Europe have been slow in coming.”
The “headwinds” being referred to are falling birth rates, ageing populations and shrinking work forces in western Europe. Between 2024 and 2027 it is projected that the working-age population in the eurozone will fall by 1.5 million workers.
Meanwhile the old-age dependency ratio – the number aged over 65 as a proportion of the population aged 15 to 64 population – is set to increase from 33.7 in 2022 to 51.2 in 2050.
While the workforce in Ireland is also ageing, Mr Makhluof said, the trend is slower than in other European countries. This is because Ireland’s fertility rate has not fallen as quickly, although it was down to 1.5 in 2023 and is converging on the EU average of 1.4.
“It means that from the mid-2030s onwards, Ireland has one of the fastest ageing populations in Europe, rapidly closing current gaps in the dependency ratio when compared to other countries,” the Central Bank boss said.
He believes the long-term growth rate of the Irish economy will slow by 2050 to below half what it was over the last half century.
“With shrinking populations, increasing labour force participation is a necessary part of the solution,” Mr Makhlouf said. “Shifting our perceptions of the working-age population can alleviate some unpleasant demographic arithmetic.”
If there was more participation in the labour force by the over 65s, the old-age dependency ratio figures would change dramatically. If retirement was pushed out to 69, instead of the more usual 64, the dependency ratio in the euro area by 2050 would be 36.6 instead of the 51.2 that it would otherwise be. In Ireland the ratio would fall from 43.2 to 29.1.
Migration offers a partial solution to the problem of declining workforces, “but the dividend from raising labour force participation rates is arguably greater”, Mr Makhlouf argued.
Labour force participation rates by relatively older people has improved in recent years. The proportion of those aged 65 to 69 in the workforce went from 13pc to 18pc in the euro area between 2019 and this year. In Ireland, the proportion has gone from 23pc to 30pc over the same period.
In terms of the impact of Artificial Intelligence, the Central Bank governor said the experience so far, including in his own organisation, suggests it has the potential to disrupt employment patterns, both as a substitute for existing workers because of the automation of certain tasks, and as a complement to existing skills.
Given the role that start-ups play in driving innovation, Mr Makhlouf said the bureaucratic and financial hurdles to starting up and scaling companies must be reduced. In the context of AI, and “Reforms that align and streamline hiring procedures across the euro area will help to minimise risks to firms of adopting new technology, as well as encouraging greater cross-country worker mobility, which will be particularly important for high-demand digital or AI skills,” he said.