General labour market conditions in the EU and its Member States
Outlook and major challenges for the labour market
Looking ahead, the EU labour market is expected to become less tight but remain strong despite challenges.
Several factors that have driven employment growth and low unemployment are expected to abate in 2024 . The inflow of non-EU nationals is likely to decrease, slowing labour supply growth, while a challenging macroeconomic climate may lower firms’ hiring intentions and reduce labour demand. Nevertheless, the unemployment rate is projected to stay near record lows in 2024 and 2025, with positive employment growth continuing. This resilience reflects improved matching efficiency and the expected acceleration of GDP growth, but also a shrinking working-age population and persistently high labour and skills shortages that may also push firms to retain more workers than needed in the future (Section 1.3). However, declining vacancies, shrinking profit margins, and structural issues such as low productivity growth and skills shortages will require policy attention.
The EU labour market may face short-term challenges
Recent business surveys point to weakened hiring intentions.
Between 2023 and the first half of 2024, employers' hiring intentions declined from high levels, particularly in services, retail, and industry, approaching historical averages by year-end. Weakening labour demand could lower the vacancy rate toward the pre-pandemic average of 1.6 %, potentially leading to a higher unemployment rate.
Weakening profit margins may also soften labour demand.
Employers typically retain more workers than needed during downturns, a practice known as labour hoarding . In 2022 and 2023, high profit margins and moderate real unit labour costs acted as a positive supply shock for firms, fuelling labour demand despite the economic weakening. That way, unusually high profit margins also contributed to the persistence of labour hoarding (Graph 1.15, 1.16 and Box 1.4 in the annex) 1.3. Labour hoarding peaked at the end of 2022, when 13 % of firms declared they retained employees despite an anticipated drop in production. It then continued to fall throughout 2023 but remained above the historical average in early 2024 (Graph 1.15). As profit margins normalise, firms may struggle to retain workers in a context of slower economic growth and still high-skill shortages.
Graph 1.15: Profit margins and labour hoarding
Note:
Standardised data. The zero line is the pre-pandemic average. Profit margins are GDP deflator divided by unit labour costs. The labour hoarding indicator is the percentage of managers expecting their firm’s output to decrease, but employment to remain stable or increase (see European Commission (2023d)).
Source:
Eurostat, and European Commission’s Joint Harmonised EU Programme of Business and Consumer Surveys.
Persistent economic weaknesses could pose challenges to maintaining the current low unemployment in the medium term
Medium-term challenges related to low productivity and skills shortages remain and, if left unaddressed, could undermine the resilience of the EU labour market.
As discussed thoroughly in the report by Mario Draghi on The Future of European Competitiveness , the EU’s low productivity growth – particularly in comparison with other advanced economies, such the United States – represents a significant and long-lasting weakness, which hampers its competitiveness, job creation and economic resilience (see also Chapter 2). Labour and skills shortages represent an additional challenge for the labour market. In the short term, these shortages may force firms to lower their recruitment standards and fill their positions with less productive workers. In the long term, they may delay the adoption of new technology, reduce labour demand and increase skills mismatches (see Box 1.2). The rest of this section will review the main components of labour productivity to identify its drivers and discuss labour shortages in the context of the current low unemployment rate.
Box 1.2: The link between productivity and employment growth
Economic history has shown that technological advances have not made labour an irrelevant factor of production. An increase in labour productivity growth means that less labour is needed to produce the same amount of output. Despite the huge technological advances of the last two centuries the employment-to-population ratio has risen continuously while unemployment has not shown any distinct rising trend. Technological progress and human capital often complement each other, enhancing productivity growth and labour demand. While specific sectors may face job losses, overall productivity improvements boost demand for complementary tasks (Autor, 2015), lower prices and increase real incomes, which drives employment growth. Thus, productivity gains in some industries can lead to job growth in less advanced ones (Autor and Dorn, 2013), generally fostering employmeny despite automation (Autor and Salomons, 2017).
Productivity growth shifts labour demand from manual to white collar jobs, with significant distributional changes. Between 2008 and 2023 in the EU, elementary occupations fell from 9.6% to 8.4% of total employment, while professionals grew from 13.7% to 22.2%. Routine tasks in medium-skilled roles are replaced by non-routine cognitive tasks in higher-skilled positions leading to a decline of blue-collar jobs (e.g. plant operators, assemblers and crafts and related trades workers) from 19.4% to 14.1%. This shift towards services, driven by productivity growth in agriculture and manufacturing, results in increased demand for both high- and low-skilled workers (e.g., health, education, finance, hospitality, and cleaning), causing job polarization and reducing demand for medium-skilled tasks (Goos et al, 2009).
Skill shortages constrain productivity growth. Human capital is crucial for driving total factor productivity through R&D, innovations, and knowledge spillovers. Skill shortages hinder productivity growth by limiting FDI Spillovers (Blomstrom and Kokko, 2003), distorting the distribution of talent across firms (Marshall, 1890), and reducing knowledge spillovers (Shimer, 2007). They also increase hiring costs (Puga, 2010) and discourage investments in general skills training (Mohrenweiser et al, 2013) and in advanced techniques due to the lack of an appropriate workforce. This can worsen job matching, potentially resulting in low-skill traps (Finegold and Soskice, 1988) and reduce output per worker, with hard-to-fill and unfilled vacancies lowering productivity by 65-75% in high-tech firms (McGuiness and Bennett, 2011). Skill gaps can result in a low-skill equilibrium slowing the growth of per capita income (Redding, 1996).
Policies are crucial for managing labour reallocation and addressing distributional challenges from productivity-driven technological changes. Boosting workers’ employability and adaptability is essential for smooth transitions between declining and growing occupations. As highlighted in the Council Recommendation on micro-credentials for lifelong learning and employability, high-quality and inclusive initial education equips workers with skills to thrive in a changing labour market; accessible lifelong learning, aligned with labour market needs, support upskilling and reskilling . Individualized job-search assistance and a well-designed safety net are also crucial for facilitating smooth transitions and maintaining high employment, in line with the Council recommendation on adequate minimum income ensuring active inclusion.
The drivers of the long-term decline of labour productivity growth
EU labour productivity growth is persistently low and forecast to remain subdued, despite some acceleration expected.
Productivity growth has consistently slowed after each recession over the past two decades (Graph 1.16). Until 2007, these three measures expanded annually at 1.4 %, 1.6 % and 1.2 % respectively. Between 2010 and 2019, the growth rates dropped to 0.8 % (see Chapter 2). In 2023, productivity growth declined further, to 0.7 % per person employed and 0.5 % per hour worked in 2023 . While EU labour productivity growth is expected to accelerate at 1.1 % in 2024 and 2025, it remains structurally low . Employment growth now contributes more to GDP growth than productivity in most Member States except Denmark, Poland, Portugal, Romania and Slovakia (Graph 1.22 in the Annex). Amid an ageing population, this weak productivity growth threatens competitiveness, economic growth, job creation, and living standards.
Graph 1.16: GDP per person employed, per hours worked, total factor productivity and capital intensity (1995=100)
Note:
Capital intensity is the capital per input of labour.
Source:
Eurostat, National accounts and AMECO database.
Subdued productivity growth stems from both cyclical and structural factors
Structural issues include lower capital intensity, human capital quality, technology adoption, firm-specific research and development, and market regulations limiting high-performing firms. The tendency of firms to engage in labour hoarding during the recent slowdown is a cyclical factor, but may also have structural elements (see Section 1.4.1).
Productivity growth within sectors drove over half of the decline of productivity growth between the pre- and post-pandemic periods.
From 2019 to 2023, productivity growth averaged 0.24 % per year, down from 0.95 % in the 2010-2019 period and 1.5 % before the 2008-2009 financial crisis. The aggregate productivity growth can be decomposed using a shift-share analysis in a component that represents productivity growth within sectors and one reflecting the effects of reallocation between sectors with different productivity levels. This analysis shows that most of the decline was driven by falling productivity within sectors (Graph 1.17), especially manufacturing and wholesale and retail, rather than by shifts in employment between sectors (the so-called structural change effect) . The significant role of the sectoral productivity growth compared to the labour reallocation effect has also been observed in the US . The widening gap in productivity growth between the US and the EU after the pandemic primarily stems from significantly higher labour productivity growth within sectors in the US, rather than from an increasing share of sectors with high productivity levels. Indeed, as highlighted in the report by Mario Draghi on The Future of European competitiveness, the key factor driving the productivity growth gap has been the superior performance of the US ICT sector and its ability to leverage large-scale digital services. The insufficient diffusion of ICT technology in the EU has contributed to weaker productivity growth in sectors as professional services and finance and insurance.
The slower aggregate labour productivity growth stems mainly from factors beyond the labour market.
Key drivers of labour productivity are the change in capital per person employed (capital deepening) and the efficiency with which the economy combines labour and capital, known as total factor productivity growth (TFP).
The growth of capital stock has kept pace with the expansion of employment, resulting in a low contribution to labour productivity growth from capital deepening.
By growing at about the same rate as employment, capital accumulation has prevented further productivity losses, drawing attention to the need for investments to boost productivity, as well as to foster innovation and sustainable economic growth. European policies have played a key role in addressing this need. Around half of the increase in public investment expected in the EU between 2019 and 2025 is estimated to result from initiatives financed by the EU budget, particularly through the Recovery and Resilience Facility . However, as emphasized in the report by Mario Draghi on The Future of European Competitiveness, a substantial increase in investment is required in order to digitalise and decarbonise the economy and enhance the EU's defence capacity.
Weak TFP growth has been the main factor behind the disappointing labour productivity growth .
Recent literature has identified several key drivers of the weak TFP growth, notably: a decline in technological innovation and adoption; insufficient reallocation of capital and labour across firms ; the ageing workforce that reduces risk-taking; and weaker human capital accumulation .
New technologies could boost productivity in the medium term, but they require investments in skills and equipment for low productivity firms.
While the pandemic accelerated digital adoption, the effects on productivity have been mixed so far, largely due to the need for complementary digital and Science, Technology, Engineering and Mathematics (STEM) skills . A firm-level analysis on thirteen euro area countries shows that only 30 % of firms can effectively leverage digital technologies. These tend to be firms that are already relatively more productive and have a highly skilled workforce .
Graph 1.17: Shift-share analysis for EU labour productivity growth
Note:
Productivity is valued added per person employed. The real estate sector is excluded because its value added is biased by the inclusion of imputed rents of owner-occupied dwellings. The structural change effect is decomposed into a static sectoral effect that measures the growth of labour productivity due exclusively to change in the sector composition; and a dynamic sectoral effect that captures the growth due to the shift of resources in sectors with expanding or declining productivity. In the within-sector productivity growth effect, the productivity growth of each specific sector is the only source of growth. In the dynamic sectoral effect, the growth of labour productivity derives from the rising importance (in terms of employment share) of sectors with initially high productivity levels.
Source:
Eurostat, National accounts.
Persistent high labour shortages may hamper productivity growth and job creation
In the medium-term, if unaddressed by policies, labour shortages risk weakening job creation and productivity growth.
The strong correlation between filled and unfilled positions (Graph 1.12) suggests untapped employment potential in expanding sectors. Persistent labour and skill shortages may limit firms’ ability to scale up production, leading them to focus on labour-saving technologies rather than product innovations. This could increase production costs, dampen demand and impact employment. Additionally, labour shortages may force workers to extend hours or to take on extra tasks, potentially reducing productivity due to fatigue and worsening job matching, which could lead to higher structural unemployment . Addressing these shortages with effective policies can improve non-price competitiveness through better product quality, innovation, and technological advancement.
In 2023, a shift occurred in the relation between labour shortages and labour hoarding.
Typically, labour shortages decrease during economic downturns as firms hold onto their workers despite slower growth (Graphs 1.18). In 2023, this pattern changed due to both short-term developments and long-term demographic trends (see Box 1.4). Specifically, firms expecting a shrinking workforce and growing demand for specialised skills may have chosen to keep their workers despite the economic slowdown .
Graph 1.18: Labour shortages and labour hoarding
Note:
Standardised data. The zero line represents the pre-pandemic average. Q1: first quarter.
Source:
European Commission’s Business and Consumer Surveys, Eurostat, Labour Force Survey (LFS).
Labour shortages that lead to retaining workers can limit the opportunities for new firms to enter the market.
In 2023, firms’ tendency to retain and hire more workers during the economic slowdown reflected severe labour and skills shortages and an anticipated shrinking working-age population due to demographic changes . This labour scarcity may make firms more risk-averse, discouraging investments with upfront costs (e.g. those leading to product innovations).