Decline in Labor Force and the Affecting Factors: Insights from System Dynamics, PEST, and SWOT Analysis in Latvia

Abstract

Like many modern economies, Latvia experiences demographic decline, which will cause shortages in the labor force in the future. This article aims to characterize the decline in the working-age population and the factors causing it using system dynamics, PEST, and SWOT analysis. First, the article provides two scenarios for the numerical presentation of a long-term change in the population of working age in Latvia due to emigration. Second, the article describes political, economic, social, and technological factors important for a territory to be economically active and attractive for living and working, which, in turn, is a prerequisite for a populous territory. Third, the article characterizes current peculiarities of the labor market in Latvia given findings on political, economic, social, and technological factors, including achievements and issues. As a result of the analysis, the article provides an analysis of a highly illustrative case study of Latvia, with low birth rates and high emigration, on the one hand, and a broad understanding of reasons for demographic decline on the other hand. In combination with the current characteristics of the labor market, the analysis provides knowledge on achievements and issues for the long-term development of the labor force. The article contributes to debates through a multimethod approach to clarify both working-age population projections and factors affecting the economic attractiveness of a territory. The novelty of the research lies in the application of system dynamics for population projections and a combination of PEST and SWOT analysis for macroeconomic issues. The findings may advise policy-making. The main research findings demonstrate that the expected decline in the working-age population in Latvia is alarming. Besides policies for preventing further decline in the working-age population, policy-making should address such issues as the lack of human capital in smart specialization areas, a low interest of society in becoming an entrepreneur, and insufficient activity in high-tech sectors of the economy. At the same time, the realization of smart specialization strategies contributes to labor market resilience.