The role of migration in weak labour force developments during the COVID-19 pandemic

Prepared by Katalin Bodnár and Derry O’Brien

Published as part of the ECB Economic Bulletin, Issue 1/2022.

Weaker than expected developments in the labour force during the coronavirus (COVID-19) pandemic may partly reflect weak net immigration. In the third quarter of 2021 the size of the euro area labour force recovered to around its pre-pandemic level in the fourth quarter of 2019.^[1] However, it remains substantially below the level expected prior to the COVID-19 outbreak. This reflects the strong impact of the pandemic on the dynamics of both the working age population and the labour force participation rate (LFPR).^[2] Subdued net immigration may have been a contributory factor, stemming from moderate migrant inflow and some foreign workers resettling in their home countries. Bringing together the available data on migration for euro area countries, this box examines the role of migration in weak labour force developments during the pandemic and the longer-term implications.

Weak net immigration partly explains a flattening out of the working age population. The working age population is usually considered to be independent of the business cycle^[3] and is influenced by two factors: natural entry and exit from the population of residents aged 15-74 and net immigration of those aged 15-74. It was rising before the pandemic and was projected to continue increasing until 2024, albeit at a moderating rate.^[4] This was predicated on a moderation or even a negative net flow in natural entry and exit from the population of residents aged 15-74. Net immigration flows were projected to contribute positively to the working age population, more than offsetting any declines in the number of working age residents. However, since the onset of the pandemic, net immigration flows have been much weaker than expected, resulting in a broadly flat profile for the working age population (Chart A).

Declines in the prime-age labour force are primarily due to secular population ageing, but may also partly reflect subdued inward migration. In general, since the outbreak of the pandemic, there have been strong declines in the population of prime-age cohorts (aged 25 to 54), which tends to have a relatively high LFPR, alongside increases in the population aged 55-64, which has a low LFPR (Chart B). Such developments within age cohorts are partially related to general demographic trends that reflect population ageing. In effect, the size of the cohorts leaving the prime-age group and entering the 55-64 age group is larger than the size of those entering the prime-age group. However, it is likely that these developments also reflect migration trends during the pandemic, as inward migrants to the euro area tend to be in the prime-age bracket.

Net immigration into the euro area fell short of the trend increase seen before the pandemic. Given data limitations and the ongoing implementation of the Integrated European Social Statistics (IESS) Regulation,^[5] it is only possible to draw tentative conclusions on how migration flows have evolved during the pandemic. EU Labour Force Survey (EU-LFS) data are used as the underlying data are available by citizenship. According to EU-LFS data, the number of foreign citizens of working age in the euro area has remained broadly unchanged since the start of the pandemic, in contrast to the rising trend observed in the preceding years. This slowdown was partly driven by a marked decline in the number of permanent migrants with foreign citizenship – mainly from non-euro area EU countries – into the euro area in 2020, a phenomenon that was common to many euro area countries (Chart C).

The labour force of foreign citizens in the euro area is about 0.2 million below the pre-pandemic level, but well below its pre-pandemic trend. While the data are surrounded by some uncertainty, a drop in foreign citizens relative to the pre-pandemic period appears to account for more than 0.1 percentage points of the 0.2% decrease in the labour force (Chart D). This is mainly owing to a lower labour supply of prime-age and younger foreign workers. The unemployment rate among foreign citizens also increased substantially more than that of nationals (increasing by 3.1 percentage points and 0.9 percentage points between the fourth quarter of 2019 and the first quarter of 2021 respectively), reflecting the more cyclical nature of the unemployment rate of foreign citizens. It is likely that the higher unemployment rate for foreign citizens triggered greater outflows, while also dissuading potential migrants from relocating to the euro area.

Migration flows during the pandemic were affected by several factors. The weaker employment prospects and pervasive uncertainty induced by the pandemic may have dissuaded potential immigrants. Moreover, it is likely that travel restrictions hindered the inflow of migrants and may have also triggered some outflows (for example, migrants may have returned to their home country for fear of not being able to visit).^[6] The share of foreign citizens is relatively high in sectors heavily affected by the lockdown measures, such as accommodation and food services (Chart E). Moreover, foreign citizens in general tend to work under less favourable conditions.^[7] They are more often on temporary contracts, and thus have a higher probability of redundancy. In addition, they may be less likely to be covered by job retention schemes and other state support programmes. Some forces may have been at work that at least partially counterbalanced the previously mentioned ones. For example, the shares of foreign workers in some essential sectors (for example, the retail trade and health sectors) are relatively high, which would have supported their employment.^[8]

The share of foreign citizens in euro area total employment may gradually converge towards the levels expected pre-pandemic, but risks are overall tilted to the downside. Inward migration flows are likely to recover as the international channel for job vacancy search and matching gradually picks up. They could also be temporarily boosted as potential immigrants currently waiting for the risk of infection and the threat of further lockdown measures to recede decide to come to work in the euro area. However, it may also be the case that some migrants who returned to their home countries have resettled on a permanent basis. This could reflect a reassessment of work-life balance or improved employment opportunities in their respective home countries. It could also be supported by remote working arrangements offered by euro area employers. Overall, the outlook for migration flows over the projection horizon and beyond remains surrounded by a high degree of uncertainty.^[9]