Although the war in Ukraine and the ensuing energy crisis dampened growth, their impact on the EU labour market was rather muted.
Almost two years after the start of Russia’s war of aggression against Ukraine, the EU economy is faring better than initially expected. GDP growth in 2022 reached 3.5 % in both the EU and the euro area, compared with initial forecasts of respectively 2.7 % (EU) and 2.3 % (euro area) in Spring 2022. The exceptional measures put in place to support households and businesses, stabilise gas and electricity prices and reduce the EU’s dependency on Russian fossil fuels have played an important role in this respect. Even though economic growth started to weaken from the second half of 2022 (with the euro area at the brink of a technical recession between the last quarter of 2022 and the first quarter of 2023), the EU labour market has proved to be particularly resilient. The EU unemployment rate stood at about 6 % throughout most of 2022 and in the first months of 2023 – the lowest rate ever recorded. Employment also continued expanding at an annual rate of 2 %, with the job vacancy rate reaching a record high and with many businesses reporting labour shortages. At the same time, the number of hours worked per person did not fully recover. Rather, it reverted back to its pre-pandemic, long-term downward trend.
The energy price shock has constrained job creation in the more energy-intensive sectors, but it did not lead to job destruction.
Good labour market performance has been broad-based between countries, with no significant divergence of unemployment rates between Member States. Some differences in employment growth have been visible between sectors, with the more energy-intensive industries displaying a slower recovery in employment after the COVID-19 pandemic. This has been due both to supply chain disruption in the initial phases of the recovery and to the energy price shock. Yet, while the latter held back new job creation, it appears not to have led to substantial employment losses. Such sustained employment levels were made possible by the emergency support measures put in place at both the national and EU levels.
Employment growth has been sustained by increasing labour market participation.
Employment growth has also been supported by an increasing labour supply, as the labour force participation rate returned to its long-term upward trend after a temporary contraction during the pandemic. This positive trend is remarkable, given that labour market participation is negatively affected by population ageing (with an increasing share of older workers, who have lower activity rates on average). At the aggregate level, the increase in the participation rate benefitted from the long-term trend of the rising labour market participation of women, older workers, EU mobile citizens, and non-EU nationals and an increased stability of employment relationships, in part enabled by labour market reforms and the use of job retention schemes during the pandemic, which preserved labour market attachment.
Labour demand shows some signs of weakening, but this is not likely to lead to a significant increase in unemployment.
The most recent indicators point to a possible slowdown in labour demand, due to weaker growth and high uncertainty. Unemployment rates tend to rise when economic growth is positive but weak (especially with an expanding labour supply). This can raise questions regarding the capacity of the economy to sustain the current low level of unemployment. Yet, given that the labour market is at present very tight, a decrease in labour demand is not expected to lead to a significant increase in unemployment. Employers would first withdraw unfilled vacancies before resorting to dismissing workers.
Significant risks remain, however, as the outlook is uncertain.
Despite the above, the unemployment rate may increase more significantly if a prolonged period of weak economic growth leads to an increase in dismissals. Similarly, increasing labour market frictions – for instance linked to rising skills mismatches – could lead to a less efficient job-matching process, with negative effects for jobseekers.
Wage growth in the EU has been robust but is still below inflation.
The tight labour market conditions and high inflation have been exerting upward pressure on wages, while the economic slowdown, increased uncertainty about labour market prospects, and higher labour market participation are expected to have had the opposite effect. On balance, we have so far witnessed wage increases, which have been robust but remained below inflation. Growth in nominal compensation per employee reached 6 % in the second quarter of 2023 (compared to the second quarter of 2022). However, in real terms, wages decreased by 0.8 % over the same period, due to persistently high inflation. Looking ahead, while nominal wage growth is likely to remain strong over the upcoming quarters, despite the economic slowdown, real wages will only start to (moderately) increase at the end of 2023. In 2024 real wages are expected to still be well below their 2019 levels.
Such developments worsen workers’ social situation, but the effects on wage inequality vary across Member States.
Real wage losses since the end of 2021 have been weighing on households’ purchasing power and have affected their social situation. Both workers’ rate of financial distress and material and social deprivation have increased sizeably. At the same time, the social effects appear to be less significant than in the aftermath of the 2008 financial and economic crisis, notably thanks to the resilience of labour markets and support measures put in place at both the EU and national level. Policy interventions, including public transfers and tax reductions, as well as significant minimum wage increases, have been introduced to cushion the impact of high inflation, in particular for low-income households. The effects on the wage distribution also vary between countries. In some Member States, higher wage growth in sectors with initially lower wage levels and minimum wage increases may lead to a narrower gap between the lower and the median wages.
In the current context, there is room for some further wage increases.
At present, businesses’ profit margins and moderate long-term inflation expectations suggest that there is room for further wage increases without igniting a wage–price spiral and jeopardising competitiveness. The possibility of further wage increases, which appears to be larger in the services sector than in manufacturing, could help accommodate further increases in statutory minimum wages: minimum wage earners tend to be more represented in some services. At the same time, developments in profits and labour costs have been contributing to the persistence of core inflation. Looking ahead, some second-round effects may occur, notably from higher-than-expected pay rises in services or profit margins, which calls for scrutiny.
Upward wage convergence is not automatic and has stalled in recent years.
Looking at wage developments from a longer-term perspective, the process of wage convergence, as expressed in purchasing power standards (PPS), has stalled in recent years. This concerns both some southern European Member States (because of a deceleration in nominal wage growth) and some central and eastern European Member States (due to a slowdown in nominal wage growth between 2019 and 2021, and then high inflation as from 2021), and large gaps persist. This suggests a prominent role for policies to facilitate upward wage convergence in the EU, by promoting productivity convergence and ensuring that workers also benefit from these gains.
A number of policies can contribute to ensuring sustainable wage increases.
A range of policies can help promote sustainable wage increases. In Member States where they exist, statutory minimum wages play an important role in protecting the incomes of the most vulnerable workers. In addition, strengthening collective bargaining and policies promoting upskilling and reskilling can improve workers’ wage prospects. Furthermore, in a context of low productivity growth, high inflation and general uncertainty, other structural policies aimed at enhancing firms’ productivity are key to supporting sustainable wage increases. In this regard, fostering the green and digital transition and ensuring its fairness remain key policy priorities. Finally, ensuring sufficient competition and diversifying supply chains can also reduce price tensions and help enhance real wages.
Working time has been on a long-term decline in the EU.
Another important aspect closely related to both workers’ well-being and their productivity is working time. The average number of hours worked has followed a long-term declining trend in developed economies, including the EU, since the 19th century. This trend has continued in the last few decades, driven by the reduction in the length of the working week and by the increase in the share of part-time workers (notwithstanding that a portion of the latter would prefer to work full-time). The COVID-19 pandemic further unsettled the organisation of work, with a sharp drop in hours worked due to the use of short-time work schemes to mitigate the economic impact of the health crisis, increased digitalisation and the mass diffusion of telework and because of changes in workers’ preferences.
Further research is needed on the impacts of working time reduction.
The EU economy is facing severe labour shortages that are weighing on its economic potential and are compounded by a shrinking working age population due to the ageing of the society. Therefore, the scope for large-scale reductions in working time may be limited, but targeted flexibilities and reductions may help to attract talent in some specific sectors or professions. When it comes to the length of the working week, while shortening working hours or reducing the number of working days can improve workers’ well-being, it also carries risks such as higher work intensity or reducing the ability of some companies to effectively organise their services or production. Overall, there is a need for more in-depth research on the economic, social and environmental impacts of working time reductions.
Overemployment and underemployment co-exist on the EU labour market.
Women, younger and older workers tend to work shorter weekly hours on average, while self-employed people, better-educated workers and people with a migrant background tend to work longer hours. Involuntary part-time workers, who are mainly women, would typically prefer to work longer hours per week, while workers with higher levels of qualification would, on average, prefer to work fewer weekly hours. Those working longer hours tend to report more job strain than other workers. Since 2015, the preference for a reduction in working time has increased, on average, notably among more educated workers and people who are financially better off.
Working time policies can reduce working time mismatches by widening the choice of weekly working hours.
Working time policies can contribute to reducing underemployment and overemployment. On the one hand, these policies can broaden the options available to adjust the hours worked by underemployed people without imposing administrative barriers, while respecting the upper limits on working time, enforcing equal treatment between part-time and full-time employees and addressing the potential risks of flexibilization. On the other hand, these policies can reduce overemployment, thereby promoting occupational health and safety. Reductions in the weekly hours for some groups of workers can take place either through collective bargaining or through businesses’ voluntary re-organisations of hours worked – while also taking into account workers’ preferences – by widening the options in terms of weekly working hours and by reducing labour market rigidities limiting the choice of hours worked. Furthermore, activation policies have been recommended for reducing involuntary part-time work and promoting the full participation in the labour market of vulnerable groups and women, notably by improving the access to quality care services for children and elderly people. Policies promoting workers’ shifts between jobs and sectors in the labour market can also both increase the participation of the underemployed and contribute to addressing labour shortages.
