Almost two years after Russia started its full-scale, brutal invasion of Ukraine, the Kremlin’s war of aggression is still ravaging the country, wreaking havoc on the Ukrainian people. The war has also caused substantial disruption to the EU economy, but the impact has been less severe than initially expected. The EU labour market in particular has been extremely resilient, with sustained job creation and record-low unemployment. Households and businesses – especially those that are more energy intensive – were affected by the sharp rise in energy prices, although that did not translate into increased joblessness. Labour market participation also resumed its long-term rising trend after the COVID-19 pandemic, more than offsetting the negative impact of population ageing. This puts the EU on track to achieve one of the headline targets of the European Pillar of Social Rights, that of having 78 % of the working age population in employment by 2030.
However, many challenges remain. Economic growth is relatively weak, and prospects remain uncertain. Persistently high inflation – initially driven by the sharp rise in energy prices, which then passed on to other items, especially food – has been eroding the purchasing power of households. Companies are faced with higher production costs and tighter financing conditions. In such an environment, labour demand is expected to moderate, albeit without necessarily translating into a significant increase in unemployment. This is due to labour shortages reaching record levels, both in the EU and across all major economies, with the EU labour market being very tight as a result – we are witnessing many vacancies and few jobseekers. At the same time, the ongoing digital and green transitions entail profound transformations that require large investments, including in human capital. Skills shortages and mismatches will also become a major challenge, with companies unable to find workers with the required skills and with jobseekers unable to find employment.
Wage developments remain in the spotlight, owing to the increased cost of living for households, but also because of their possible influence on inflation dynamics. Overall, wage growth has been robust but remaining below inflation, with significant differences among Member States and economic sectors. This has increased workers’ financial distress, with significant implications for their overall well-being too. Looking ahead, real wages are still expected to decrease in 2023. At the same time, moderate long-term inflation expectations, and the resilience of businesses’ profit margins in some sectors, suggest some room to further increase wages, while remaining vigilant about second-round effects on inflation. Statutory minimum wages will continue to play an important role in protecting the incomes of vulnerable workers. Sustainable wage increases, in line with productivity developments, can be supported by strengthened collective bargaining and by policies that promote upskilling and reskilling, innovation and competitiveness. From a longer-term perspective, it is important to promote upward wage convergence across EU countries, a process that stalled in recent years, notably by encouraging productivity convergence and ensuring that workers can benefit from these gains.
This report also looks at the evolution of working hours, an important aspect of labour supply and of working conditions. The average number of weekly working hours has been declining in the EU since 2008. This trend accelerated with the COVID-19 pandemic. Teleworking arrangements put in place to preserve Member States’ healthcare systems, which gave a strong impetus to digitalisation, led to a more flexible organisation of work and highlighted the importance of work–life balance. Some companies in Europe have been experimenting with targeted reductions in working time, which have also been used as a way to attract and retain skilled labour amid the current high labour shortages. Such policies can indeed increase the well-being of workers, but their macroeconomic impact depends on a broad range of factors. Whereas high labour shortages and adverse demographic trends limit the scope for large-scale reductions in working hours, targeted flexibilities and working-time reductions may also help to attract talent in some specific sectors or professions. The Working Time Directive provides room for companies and social partners to develop such policies for their sectors. At the same time, public policies must focus on integrating more people into the labour market and reduce the prevalence of involuntary part-time work among women and vulnerable groups.
Nicolas Schmit
Commissioner, Jobs and Social Rights
