Demographics vs. economics: why labour migrants will not save Ukraine from recession

Yuriy Gavrylechko, Economic expert, Philosophy doctor in Public Administration

Every time public debate turns to Ukraine’s demographic crisis, the same refrain sounds like a mantra: bring in labour migrants – and the problem is solved. The recipe looks logical. Fewer people – less production – lower GDP. More people – more hands – more production. Simple arithmetic.

The trouble is that economics is not arithmetic. And Ukraine’s current situation is a vivid proof of that.

Labour market structure: who actually needs more workers?

Let us start with figures that rarely appear in optimistic demographic forecasts. Of approximately 10 million employed people in Ukraine today, only 6 million create added value – that is, they produce goods and services for which someone pays on the market. The remaining 4 million receive their wages from the state budget: the military, the civil service, education, healthcare, law enforcement and so on.

This does not mean those people are unnecessary. Teachers, doctors and soldiers are critically important. But from the standpoint of a market economy they are consumers, not creators of added value. Their salaries are funded by the taxes paid by the six million – or, increasingly, by external borrowing.

Now the blunt question: if we attract three hundred thousand labour migrants – where will they work?

If they are unskilled – there are no vacant jobs for them. Business is not expanding under current conditions; new production facilities are not opening; the services sector has contracted because of falling household purchasing power. Bringing unskilled labour into an economy that has no demand for it is not a solution – it deepens the problem: more people compete for the same number of real jobs.

If they are skilled – the situation is even more telling. A skilled specialist needs a skilled, capable and financially strong(!) employer with plans for business development. For those plans to materialise, the employer needs: free working capital and investment, resources for scaling, access to new sales markets and so on. None of that is available in sufficient quantity under present conditions.

The fiscal and regulatory trap

Business in Ukraine operates in conditions that structurally suppress any growth. The tax burden – which includes the Unified Social Contribution (ESV) of over 22% on top of wages – makes formal employment an expensive proposition. The regulatory environment is not being simplified despite declarations: inspections, permits, liability without clear jurisdiction. A judicial system that does not protect investor rights. Currency restrictions that complicate foreign economic activity.

In such conditions the question “how many people should we attract” is secondary. The primary question is: why should business hire them at all? If an entrepreneur sees no possibility of scaling up, he does not expand his payroll. If bank credit is available only at rates of 20% and above, and investment capital from abroad is not entering because of wartime risks – new production does not appear. And no number of migrants will eliminate that fundamental imbalance.

The consumer market: contraction without end

In parallel, a process is under way that macroeconomists call the compression of domestic demand. The consumer price index is rising. The real purchasing power of the population is falling. People buy less, buy cheaper and buy less frequently. This hits the revenues of businesses that are already cutting costs.

The standard response to falling domestic consumption is to enter external markets. If people are not buying at home, sell abroad. But that path also runs into serious obstacles.

First, any serious external market expansion requires resources: marketing budgets, logistics solutions, certification, product adaptation. Under constrained conditions these resources are a luxury that most Ukrainian businesses cannot afford.

Second, the global trade architecture has undergone serious change since Donald Trump’s return to the White House and the proclamation of the new US economic policy. The protectionist wave has swept not only the United States – it has triggered a chain reaction of defensive measures in dozens of countries that are narrowing access for new market entrants. In a world of global protectionism, finding a new niche for Ukrainian goods would be difficult even under ideal domestic conditions. Under current ones, the task approaches the impossible without purposeful state support – especially when it comes to high-technology sectors such as the defence industry.

Why quantitative solutions do not work

There is a certain type of thinking – call it “quantitative optimism” – according to which any problem can be solved by adding enough of something: people, money, time, technology. Demographic problem? Attract people. Budget deficit? Raise taxes. Trade imbalance? Increase exports.

The problem with this approach is that it ignores the structural conditions in which those quantitative changes are supposed to occur. If the structure cannot productively absorb new people, their presence changes nothing. If tax increases destroy the business environment, the fiscal effect turns out lower than expected. If the trade infrastructure and companies’ marketing capabilities are not ready for expansion, increased production will go “nowhere” – except into a warehouse.

Ukraine’s current situation is a relatively balanced system – but balanced in the direction of slow contraction. Recession does not explode instantaneously; it seeps through the system gradually: fewer investments, fewer new enterprises, less formal employment, less budget revenue, fewer public services, less purchasing power – and around again. Without changing structural conditions, this trend has its own internal logic and a terminal point.

What can actually work

The way out is not a single decision in a single domain. It requires a comprehensive strategy in which different reforms reinforce one another rather than existing in parallel bureaucratic universes.

Civil service and the quality of governance decisions. The quality of economic policy is determined by the quality of the people who formulate and implement it. Without genuine meritocratisation of the civil service, without attracting competent professionals from the market, and without a system of accountability for results, any strategy becomes a beautifully formatted document.

Education – a long-term investment in productive capacity. The education system continues to reproduce workers for the labour market of thirty years ago. Rebuilding curricula around the real needs of the economy is a slow process, but without it each successive generation will enter the market with skills for which there is no demand.

Deregulation and a genuine reduction in the fiscal burden. Not declarative – but measurable. With concrete indicators for simplifying business registration, reducing the number of inspections, and reforming the unified social contribution to make formal employment more affordable. Without this, business will have no incentive to expand its workforce even when qualified labour is available. In addition, it is worth thinking carefully about the sources of funding for the state’s social obligations and aligning them with the new tax policy.

Investment climate. Protection of property rights, judicial independence in commercial disputes, predictability of the regulatory environment – these are not abstract demands of international institutions. They are the preconditions for investment capital to regard Ukraine as an option worth including in development plans at all.

Ukraine’s own protectionist measures and support for business in external markets. If the whole world is protecting its market, Ukraine cannot be the only player still following the free-trade rules of the 2010s. Targeted support for domestic exports – subsidies, risk insurance, diplomatic accompaniment of trade agreements, joint consortia for entering new markets – is not a deviation from market principles but their pragmatic application under conditions of asymmetric competition.

Instead of a conclusion…

The question “how many people do we need” is a second-order question. The first-order question is: what kind of economy are we building, and is there room in it for productive work?

Labour migrants can become a resource – but only when the system is ready to deploy them effectively. As long as the regulatory environment suppresses business, as long as the fiscal burden makes formal employment expensive, as long as investment capital for creating new production is absent – new people will add not productivity, but burden.

Demographics is a symptom, not the disease. And treating the symptom while leaving the causes untouched is a luxury that Ukraine in its current state cannot afford.