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Demographic trends can have direct implications for labor markets through three primary channels: labor supply, labor productivity, and labor demand (because of shifts in the structure of aggregate demand). This chapter focuses on the first two. The conventional wisdom is that aging societies will face difficult economic and social challenges because of what will inevitably happen in the labor market—that is, output will be reduced because the labor force will shrink as large numbers of workers retire and because older workforces cannot produce at the level of younger ones.

An inevitable consequence of population aging in many Eastern European and former Soviet countries is that, at current benefit levels, pension spending will have to rise to accommodate the increased number of elderly people. This is an especially huge challenge for countries with unfunded pay-as-you-go (PAYG) social security systems, in many of which pension spending is already substantial. The good news is that a number of countries in the region have begun considering measures to mitigate the impact of imminent demographic changes and are engaging in aggressive pension reform. Other countries have yet to come to terms with the looming pressure of rising pension expenditures as their populations age. Although most of these countries are young, a few older countries have been slow to introduce much needed reforms, and unless they change their pace, pension spending will come to pose a much heavier burden over time.

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