Employment and Social Developments in Europe (ESDE) 2024

3. Selected types of social investment

3.3. Investing in skills

Effective investment in skills can increase employment, competitiveness and productivity, fostering economic growth. ⁽¹⁶²⁾ skills needs, particularly in the context of the green and digital transitions, will require additional investment in adult learning, upskilling and reskilling. These investments can improve employability prospects, addressing skills shortages and mismatches.⁽¹⁶³⁾ Investment in lifelong learning helps people to develop their skills in line with labour market needs throughout their entire career, increasing their chances of remaining in the labour market. A labour force with an up-to-date skillset is central to boosting productivity and growth, supporting wages as well as firms’ competitiveness. ⁽¹⁶⁴⁾ The European Pillar of Social Rights Action Plan sets an EU headline target of at least 60% of adults participating in training each year by 2030, compared to a participation rate of 39.5% in 2022. The analysis below examines a selection of social investments and illustrates the return on investment in skills of young unemployed people and productivity-enhancing training for the broader population. Within this, Box 3.4 provides additional analysis on the investment needs related to re- and upskilling in the context of the green transition.

Investment in skills for young unemployed people

Young people who are not in employment nor in education or training (NEET) face a higher risk of becoming disconnected from the labour market and social exclusion, with potential negative long-term effects on their entire working lives. ⁽¹⁶⁵⁾ In the context of the European Pillar of Social Rights Action Plan, the EU strives to reduce the share of young people who are NEET, from 12.6% in 2019 to 9% by 2030. Different types of interventions and pathways can support young people to enter the labour market. For instance, a majority of trainees feel that a past traineeship experience supported their professional development and made their transition from school to work easier. ⁽¹⁶⁶⁾ Vocational education and training and apprenticeships can help develop job-related skills and help young people enter the labour market.

Additional well-designed investment to increase the skills of young unemployed workers is expected to increase employment across all ages in the long term. Investing in the skills of young unemployed people (aged 15-24) can tackle high youth unemployment rates. The average macroeconomic effects of skill-enhancing interventions for young unemployed people for the six countries with the highest youth unemployment rates in 2022 ⁽¹⁶⁷⁾ were estimated using DG EMPL’s Labour Market Model (LMM) (Box A3.1 in the Annex). ⁽¹⁶⁸⁾ Based on the model simulation, young workers are expected to experience the strongest employment gains, with the number of people aged 15-24 employed increasing by 1.4% due to around a 0.1 pp increase in investment in skill-enhancing training (Chart 3.7). Overall, employment is expected to increase by 0.25%, with early investment in skills assumed to have a sustainable, although decreasing, impact on employability throughout people’s lives. Increasing investment in skills for young unemployed people can contribute to upward social convergence. Assuming that training is well-designed – and thus effective at enhancing skills and reducing unemployment rates – the analysis suggests that the additional spending would lead to a small reduction in disparities and prompt catching-up in unemployment and employment rates, not only for the beneficiaries of the training (aged 15-24) but for the overall working-age population. ⁽¹⁶⁹⁾

Helping young people to improve their employability leads to broader positive macroeconomic returns, driving investment and GDP. The initial cost of the measure is estimated to be more than offset by larger economic returns. The overall rise in employment is expected to trigger additional investment to equip new workers with additional capital. As a result, GDP is projected to increase by 0.18% in the long term, compared to a scenario without any additional investment in young unemployed people (Chart 3.7).

Investments in skills enhance productivity

Regional investment in skills in the context of the European Social Fund Plus (ESF+) can lead to significant increases in economic activity in the long term.The European Commission’s RHOMOLO model is used to simulate the potential regional macroeconomic impact of ESF+ investments in skills over the 2021-2027 funding period, which are assumed to increase labour productivity (Box A3.1 in the Annex). ⁽¹⁷⁰⁾ The simulations illustrate that ESF+ funding for skills, in addition to the direct employment and social benefits expected in the areas and sectors targeted by the projects financed, could increase EU GDP by up to 0.039% at its peak in 2036 relative to baseline GDP (Chart 3.8). GDP is expected to remain above its baseline level even after expenditure on ESF+ terminates, as the structural effects of increased labour productivity and corresponding adjustments by firms and households materialise. Overall, the initial cost of the measure, at less than 0.035% of GDP per year, is more than offset by the long-term economic returns, which are significantly larger than the original investment.

Targeted investments in skills can lead to employment gains throughout the funding period and in the long-term.At their peak in 2026, EU-level employment gains are projected to be 0.024% compared to the baseline scenario of no investment, with the largest employment gains expected for the lowest income quintiles (Chart 3.9). ⁽¹⁷¹⁾ This impact is larger in regions with more significant investments. ⁽¹⁷²⁾ When the demand stimulus related to the ESF+ funds ends, employment decreases and temporarily dips below its initial level, ⁽¹⁷³⁾ before recovering and rising above the initial level in the long term. ⁽¹⁷⁴⁾ Developments in the unemployment rate mirror these results, with decreases in unemployment rates projected in the short and long term, as vacancies for upskilled individuals who benefitted from the programmes are filled (Chart 3.9).

Targeted investment in skills has the potential to contribute to sustained regional economic convergence.The simulation suggests upward convergence in GDP per capita between NUTS2 regions in the EU as a result of the ESF+ 2021-2027 funding period (Chart 3.10). ⁽¹⁷⁵⁾Regions with lower relative GDP per capita are projected to grow more strongly as a result of the funding, catching up with regions with higher initial GDP per capita levels. ⁽¹⁷⁶⁾ Despite evidence of regional convergence in employment levels during the funding period, ⁽¹⁷⁷⁾ these effects are not sustained in the medium and long term. This could be because of an overall improvement in outcomes in regions not directly receiving ESF+ funding but experiencing positive spillover effects. This is in line with previous analyses showing that improvements in skills-matching in some regions may have positive spillover effects into other regions. ⁽¹⁷⁸⁾ These overall improvements would thus limit the potential for convergence across regions (Box A3.1 in the Annex).⁽¹⁷⁹⁾Individuals might also need to be retrained in the medium to long term in line with changing skills needs, reducing the effect of the intervention in the medium to long term. ⁽¹⁸⁰⁾More generally, the convergence impact of skills-related ESF+ investments on labour market outcomes appears to be limited, as the changes in the standard deviations (as a measure of convergence) are relatively small in scale (Chart 3.10).