The number of foreign-born workers in Germany has increased by more than 30% during the last five years, from 4.1 million to an estimated 5.4 million. As a percentage, foreign-born workers in the German workforce have almost doubled in the last ten years alone, rising from 9% in 2015 to 16.2%.
So, why does Germany need to import labor?
According to OECD and EU labor market evaluations, Germany’s current economic issues are commonly viewed as a skills mismatch, a labor shortage, and a migration issue.
Germany faces a legally enforced growth constraint due to a declining labor force, which persists regardless of capital, technology, and market access availability.
Germany’s Labour Deficit
The German Chamber of Commerce and Industry (DIHK) believes that German businesses are still investing, innovating, and competing internationally; however, an increasing percentage of their productive capacity remains underutilized, not due to low demand, but rather a labour deficit.
This is not a cyclical disruption that can be fixed by short-term policy intervention or investment. It is the outcome of long-standing demographic patterns that are currently interacting with the fundamental principles of economic expansion. As a result, labour supply is now the key factor influencing Germany’s future output trajectory.
Germany has an incredibly deep capital foundation, seen best with their advanced manufacturing capabilities, industrial infrastructure, and consistent investments in people and physical capital.
The nation is also renowned for its high productivity, bolstered by institutional stability, rapid technological adoption, and its long-running integration into global markets.
And while long-term economic growth has historically been supported by these but labour is what enables both capital and technology to become output, and isn’t just another factor of production. Regardless of how sophisticated or plentiful the capital is, its productive potential cannot be fully realized when labour supply shrinks.
It also explains why, even with strong demand, Germany continues to face economic challenges. Since labour isn’t growing at the same pace as capital is accumulating and technology is advancing, leading to declining output growth. In the current scenario, investing more would only result in diminishing returns since there isn’t nearly enough labour to use it efficiently.
Germany’s Reliance on Foreign Labour
Germany’s reliance on foreign labour is necessary to maintain its growth model. By restoring the balance, increasing the effective workforce allows for an increase in capital and productivity to become actual production.
With a median population age of roughly 45.5 years, Germany is one of the world’s oldest societies. For several decades, fertility rates have been far below the replacement threshold; the most recent estimate was 1.35 births per woman as reported by Destatis (the Federal Statistical Office of Germany). Low fertility and increased life expectancy have worked together to gradually reduce the number of new workers entering the workforce.
According to Destatis, Germany’s working-age population might decrease by up to 37% by 2070 if increased immigration doesn’t continue, even if the country’s overall population stays mostly unchanged.
The magnitude of the present retirement wave compounds this problem. A sizable portion of Germany’s labour force is made up of generations that are very close to or have already reached retirement age.
The Federal Employment Agency reports that the percentage of workers who are 55 years of age or older has increased to about 23%, indicating that they will be leaving the workforce more quickly in the coming years. There is a structural vacuum that cannot be filled by the domestic labour supply alone, since replacement generations entering the workforce are much smaller.
Rising dependency ratios are another way that these demographic changes put pressure on the welfare system. The proportion of people 65 and older to those of working age has worsened to almost 1:3, and by 2035, Destatis estimates suggest that this ratio will have further declined to almost 1:2.
This also continues the labour constraint that was previously noted: fewer workers are now responsible for supporting more people who are not employed, increasing the financial cost of each absent worker.
A sudden push for higher fertility rates won’t produce an immediate impact, as techniques to adjust demographics have massive time lags. It would be at the very least 20 years before this yields results.
In a nation with pre-existing high participation, forced labour participation by delaying retirement would only partially alleviate the tightening labour supply.
Regardless of how advanced they may be, an economy facing a declining labour input cannot fully utilize its capital stock or enhancements in productivity, as the production function framework makes evident.
Hence, Germany’s increasing reliance on immigrant labour is an effort to balance the changing demographics. Labour mobility becomes the main adjustment mechanism via which the economy maintains production, stabilizes growth, and maintains its productive capacity when the domestic labour supply is structurally limited and long-term demographic patterns are firmly established.