General labour market conditions in the EU and its Member States
Almost two years after the start of Russia’s war of aggression against Ukraine, the EU economy is faring better than initially expected. Gross Domestic Product (GDP) growth in 2022 reached 3.5 % in both the EU and the euro area, compared with initial forecasts of 2.7 % (EU) and 2.3 % (euro area) in spring 2022. The labour market has also proved to be particularly resilient, with continued job creation and record-low unemployment. In 2022, the unemployment rate stood at about 6 %, the lowest rate in the years for which the EU aggregate is available, while employment increased by 2 %, benefitting from a strong recovery after the pandemic recession. The job vacancy rate also reached a record high.
Good labour market performance has been consistent between countries, in contrast to previous crises, which were characterised by a strong divergence in unemployment rates between Member States. The drop in unemployment was greater (in relation to the pre-pandemic average) in countries with high unemployment levels, thus resulting in a convergence in unemployment levels between Member States. Some differences in employment growth are visible across sectors, with the more energy-intensive industries recording lower job creation. Employment growth has also been supported by increasing labour supply, with labour market participation returning to its long-term upward trend after a temporary contraction during the pandemic; at the end of 2022, the activity rate (for those aged 15-64) was 65.2 %, one percentage point higher than in the last quarter of 2019. At the aggregate level, the participation rate benefited from an increased stability of employment relationships, which was observed throughout the pre-pandemic period, and from the extensive use of job retention schemes during the pandemic. The increase in the participation rate of EU mobile citizens and of non-EU nationals provided a positive (although small) contribution to the increase in the overall participation rate.
Still, the growth momentum has weakened and the economic environment remains highly uncertain. At the end of 2022, GDP growth contracted slightly (-0.1 %) and remained weak in the first half of 2023. Since the unemployment rate generally rises not only during recessions but also when economic growth is weak, there could be concerns regarding the capacity of the economy to sustain the current low level of unemployment – especially since several indicators point to a possible slowdown in labour demand. At the same time, given the very strong starting conditions, with very tight labour markets, a decrease in labour demand is not expected to lead to a significant increase in unemployment, as employers would first close unfilled vacancies before resorting to dismissing workers. However, the picture may change if a prolonged period of weak growth and/or increasing labour market frictions – for instance linked to rising skills mismatches in the context of the transition towards a digital and carbon-neutral economy – trigger an increase in dismissals and/or a deterioration in the job-matching process.
Introduction
The EU economy has shown strong resilience in the face of geopolitical tensions, persistent inflation and tightening financial conditions.
After returning to pre-pandemic levels in the third quarter of 2021, economic activity in the EU continued to expand at a rapid pace throughout the first half of 2022 thanks to a strong growth momentum following the recovery from the pandemic . Economic growth started to decelerate in the third quarter of 2022 and turned negative in the fourth quarter (-0.1 % quarter-on-quarter) on the back of still predominant – although gradually abating – supply constraints, persistent inflation – including a rapid increase in food and energy prices – and tightening financial conditions. This contraction has been much milder than what was initially expected (-0.2 %), and GDP growth turned positive again in the first quarter of 2023 (0.1 % quarter-on-quarter) (Table 1.1). The global growth outlook for 2023 and 2024 has been revised slightly downward .
Table 1.1:Unemployment, compensation per employee and GDP growth in the euro area and the EU
Note
For the unemployment rate changes are in percentage points.
Source
Eurostat, National accounts, Unemployment by sex and age – quarterly data (une_rt_q), GDP and main components (output, expenditure and income) (namq_10_gdp) and Employment A*10 industry breakdowns (namq_10_a10_e); and Eurostat, Prices, HICP – monthly data (annual rate of change) (prc_hicp_manr) and HICP – monthly data (monthly rate of change) (prc_hicp_mmor).
At the same time, economic growth is expected to remain weak in 2023 and the economic environment remains highly uncertain.
The sustained geopolitical tensions, the persistent non-energy inflation, the resulting tightening of financial conditions and the latest financial turmoil remain key downside risks. Energy inflation has come down sharply since the end of 2022 (after exceeding 40 % between March and October 2022), but the non-energy components of inflation remain sticky. Both food inflation and core inflation (which excludes the more volatile energy, food, alcohol and tobacco components) kept rising throughout 2022 and the first quarter of 2023 – reaching all-time-highs of 19.6 % and 6.6 %, respectively, in March 2023. In response to high inflation, central banks around the world have been tightening their monetary policy. While this is expected to bring inflation down, only a slight reduction in underlying inflation is expected in 2023. According to the European Commission’s 2023 Summer forecast, EU inflation is projected to remain at 6.5 % in 2023 and to reach 3.2 % in 2024. The tighter monetary policy stance and persistent inflation may have an impact on domestic demand and, in turn, on labour demand.
Against this background, this chapter discusses how the EU labour market is developing as the balance of risks to economic growth remains tilted to the downside.
Section 1.2. reviews the general labour market developments in the EU and its Member States, looking at the evolution of labour demand and supply, and assessing the employment impact of the energy crisis across sectors and countries. Section 1.3. discusses the prospects for unemployment as the economy slows down but from a starting point of tight labour market conditions. Section 1.4. summarises the main findings and draws policy implications.