Modeling migration dynamics in stochastic labor supply forecasting

Population size and structure in conjunction with the participation behavior are the determinants of labor supply. Thereby, among the demographic components, migration is the one shaping both the size and the structure of a population the strongest in the short to medium term while simultaneously exhibiting high uncertainty, with migration patterns varying between origin-destination-pairs depending on a range of economic and other determinants. Yet, existing stochastic forecasting approaches that jointly address population and labor force participation are sparse and do neither account for differences in future immigration flows across origin countries nor for the interdependencies of immigration and emigration in the destination country. Addressing this shortcoming, we propose an augmentation of an integrated stochastic population and labor force participation forecasting framework by a gravity-equation component to model future immigration and emigration, their interaction, and their determinants more appropriately. By conducting a stochastic forecast, we find that until 2060 the potential labor supply in Germany is declining by 11.7 percent, strongly driven by the even more distinct decline of the working-age population and only partially cushioned by rising participation rates. Thereby, increasing immigration to Germany is highly probable, yet its net effect is limited due to simultaneously rising emigration figures.