A surprisingly rapid increase in immigration over the last few years has halted the decline of the working-age population in Finland. If net migration continues to exceed previous expectations, it could boost the potential growth rate by up to half a percentage point. A lower dependency ratio would decrease the public sector deficit and, combined with faster economic growth, significantly slow the rise in the public debt ratio.
The prospect of a rapidly aging population has long been a key concern for Finnish public finances. The working-age population started to decline as the baby boomers aged. The post-war baby boom was particularly drastic in Finland, as most potential fathers were conscripted during the Second World War. A gradual decline in fertility seemed to ensure that the supply of workers would continue to diminish for the foreseeable future.
Contrary to forecasts, the working-age population stopped declining in 2022 and has grown by around half a percent in the past two years. This is explained by a surge in immigration.
The graph shows the development of Finland’s net immigration and births from 2006 to 2024.
Not just a temporary fluke
The spike in net migration in 2023 is partly due to refugees from the war in Ukraine. However, the rise in immigration started before the war, and net annual migration has been twice as high as during the previous decade even excluding Ukrainians.
Finnish employers have become increasingly keen to seek workers from abroad due to a tightening labour market. The pressure to recruit foreign workers increased toward the end of the last decade, as the economy recovered from the prolonged economic slump after the financial crises and unemployment fell. Travel restrictions during the pandemic, however, delayed the upswing in immigration until 2022.
The present government explicitly recognizes the need for international recruitment.
The present government explicitly recognizes the need for international recruitment. It aims, for example, to shorten the time for approval of work permits as well as to increase the supply of English-language education and day care.
The economic downturn triggered by the ECB rate hikes has dampened the demand for foreign workers, especially in the construction sector. That net migration has remained strong lends additional credence to the view that we have seen a shift toward permanently faster immigration.
Boost to growth
Based on recent developments, Statistics Finland calculates that the annual growth of the working-age population could be half a percentage point higher than it projected in its 2021 forecast. The projection assumes that immigration will remain at recent levels, excluding Ukrainian refugees. The Ministry of Finance, in its economic forecasts, has a significantly more conservative outlook for future immigration.
The impact on GDP growth depends on how well and how productively the immigrants are employed. On average, the employment rate of foreign-born residents is about ten percentage points lower than that of native Finns. The average hourly income of foreign-born workers is also fifteen percentage points lower than that of native-born workers, indicating they perform less productive work. The Ministry of Finance accordingly assumes that the boost to GDP growth would be notably smaller than the boost to the growth of the working-age population.
However, the employment rate of foreigners varies significantly depending on the reason for migration. Refugees have often had great difficulties finding gainful employment. Foreigners granted residence permits to work have an even higher employment rate than native-born residents. Foreigners coming to study also quickly gain employment.
The average income of work-related immigrants is even slightly higher than that of native-born residents, despite their lower average wage, because they work more hours on average. Thus, the boost to GDP from increasing work-related immigration could well be as large as the rise in the working-age population.
The boost to GDP from increasing work-related immigration could well be as large as the rise in the working-age population.
As work and education have become the predominant drivers for immigration, the difference in the employment rate of foreign-born and native residents has sharply shrunk over the past decade. However, the recent downturn is a reminder that the employment of immigrants is also very sensitive to the business cycle.
The graph shows the development of employment rates for those born abroad, born in other EU countries, born outside the EU, and born in Finland from 2015 to 2024.
The employment rate of native residents has also risen substantially in Finland over the past decade. A major reason for this is several reforms aimed at increasing the retirement age. The median retirement age has risen from 63.1 years in 2017 to 64.3 years in 2023 and is set to continue climbing as the minimum retirement age is set to gradually increase.
Smaller deficits, less debt
Increased immigration has a clear positive impact on the ratio of non-working-age to working-age population, i.e., the dependency ratio, as the immigrants are clearly younger than the overall population. Statistics Finland now projects that the dependency ratio will decline over the next decade. The dependency ratio in 2035 is expected to be nine percent lower than assumed in 2021.
Statistics Finland now projects that the dependency ratio will decline over the next decade.
A decreasing dependency ratio would particularly improve the state of the statutory pension system, alleviating the pressure to raise social security contributions. State finances would also improve as the costs of caring for the elderly would be distributed across a larger number of taxpayers.
The graph shows the actual development of Finland’s dependency ratio from 2010 to 2024, along with two projections until 2036. The dependency ratio is presented in the graph as the proportion of the population under 20 years old and over 69 years old relative to the working-age population.
Even without any decline in public deficits, faster GDP growth would mean that the public debt ratio would rise less than previously assumed. An increase of half a percentage point in annual GDP growth would, in 10 years, push the public debt-to-GDP ratio almost five percentage points lower than it would otherwise be.
While no panacea, faster immigration could thus substantially help the government in its efforts to stabilize public debt.
