Germany faces growing labor shortage amid demographic shifts, migration key to economic stability

Germany is facing an escalating labor and skills shortage driven by demographic shifts and the impending retirement of the baby boomer generation. As the domestic labor force potential declines, migration is expected to play a crucial role in sustaining the country’s production capacity and economic growth.

According to recent economic analyses, Germany’s potential economic growth rate, currently at 0.4%, could plummet to zero without significant migration. To counteract this trend and restore the long-term average growth rate of 1.1% by 2029, an estimated 1.5 million additional workers would need to immigrate. This would require a total population increase of approximately two million people.

The challenge of labor shortages is exacerbated by the fact that employment growth in recent years has been driven solely by foreign nationals. Data from 2024 indicates that while the number of foreign workers in socially insured employment grew by 5.2%, the number of German employees decreased by 0.5%.

In response to this pressing issue, Germany has implemented policy measures such as the reformed Skilled Immigration Act, designed to attract qualified workers from non-EU countries. However, experts emphasize that further steps are needed to enhance the effectiveness of these initiatives. Bureaucratic hurdles, such as delays in visa processing and recognition of foreign qualifications, continue to deter potential migrants. Surveys show that many skilled professionals interested in relocating to Germany remain unaware of the recent legislative changes aimed at easing their entry into the labor market.

In addition to simplifying the recruitment process, integration measures are essential to retain foreign talent. Many migrant workers face challenges such as discrimination in housing and employment, as well as limited job opportunities for their partners. These factors contribute to high attrition rates among foreign workers, with an annual average of 838,000 leaving Germany between 2015 and 2023.

The labor market imbalance is further highlighted by the high proportion of migrants employed in low-skilled jobs, with 37% of foreign workers engaged in unskilled labor compared to 17% of the general population. Addressing this issue will require targeted training programs to align immigrant skills with labor market demands and promote career advancement opportunities.

Germany’s economic future hinges on the successful integration of foreign workers alongside domestic initiatives to increase workforce participation among underrepresented groups, such as women and older employees. Policymakers are urged to enhance childcare services, reform tax structures, and introduce incentives for extended workforce participation to maximize the domestic labor pool.

As the country navigates these demographic and economic challenges, a comprehensive approach combining streamlined immigration policies, effective integration strategies, and domestic labor force development will be critical in ensuring sustainable economic growth and social cohesion.

Authors: Angelina Hackmann, Konstantin A. Kholodilin and Teresa Schildmann - DIW Berlin