Republic of North Macedonia: Selected Issues

This Selected Issues paper examines the expected costs of the population decline on potential output growth in New Macedonia. The IMF estimates that the population decline would create a drag on output growth of around 0.5 percentage points. Increased emigration, potentially driven by further EU integration, presents a downside risk to outlook as it could further worsen population dynamics. In order to study the impact of further EU integration, the paper employs a structural model of the European labor market with migration. Negative impacts of further EU integration from increased emigration can be offset by increasing productivity. The paper also shows that productivity-increasing structural reforms, active labor market policies, new business support, and labor participation support can all boost potential output, helping to offset some of the negative impact of migration. Policies can bolster the labor market and be a catalyst for economic growth. The analysis highlights large structural barriers in the productivity of workers, the matching efficiency between workers and firms, and the cost of creating new vacancies in North Macedonia compared to European countries.