General labour market conditions in the EU and its Member States
Policy implications
Despite its current strength, the EU labour market faces several challenges that require policy attention.
Declining profit margins could dampen labour demand in the short-term, particularly if wage increases are not matched by an increase in productivity growth, and so could a further drop in vacancies (see also Chapter 2). Structural challenges include skills shortages and low productivity growth in the context of the twin transitions . This requires a comprehensive policy response to promote the activation of labour potential, up-skill and re-skill the workforce, facilitate labour reallocation and improve working conditions. Demographic changes may further tighten the labour market by reducing the size of the working-age population which is unlikely to be offset by net migration flows.
Addressing labour and skills shortages is crucial for boosting sustainable economic growth and mitigating the root causes of weak productivity growth.
Rapid technological changes are driving a quick rise in the demand for specific skills, outpacing the current supply. An ageing population not only leads to a decrease in the workforce but also accelerates skills obsolescence as technology evolves rapidly. In the short term, skills shortages may lead firms to rely on less qualified people, resulting in suboptimal talent allocation. In the medium term, firms may adapt to skills shortages by adopting less skills-intensive technologies or automating tasks that do not necessarily enhance productivity, leading to low-skilled equilibrium characterised by low productivity, a poorly trained workforce and low wages. Addressing skills shortages, including through employer provided training, would increase labour mobility, thus reallocating workers to high-demand occupations and freeing up positions in non-shortage occupations. In a situation of near full employment, these outcomes can boost employment growth only if matched by qualitative and quantitative improvements in the labour supply.
The EU Action Plan on labour and skills shortages, adopted in March 2024, outlines a comprehensive set of policies aimed at mobilising all underutilised resources.
Its implementation will foster workforce adaptation to demographic and technological changes and boost innovation, enhancing long-term economic resilience and competitiveness . The EU Talent Pool will ease the matching between jobseekers from outside the EU and job vacancies for shortage occupations with EU employers. The European Skills Agenda is the strategic EU framework for addressing upskilling and reskilling needs. Its flagship actions include initiatives on individual learning accounts and micro credentials , which will foster the acquisition of competences and increase the participation of adults in education and training, thus improving the matching of skills and jobs. Increasing labour force participation, especially, as discussed in Chapter 3, among older workers, women and the young who are not in education, employment or training is essential. Swift implementation of initiatives in skills development and training, improving fair intra-EU mobility, and attracting talent from outside the EU will make the workforce adaptable to structural changes, including those linked to the twin transitions. These measures will promote smooth labour reallocation, boost productivity and competitiveness, and support higher and sustainable wage growth, as well as improving working conditions. Attracting and integrating talent from outside the EU and promoting the labour force participation of underrepresented groups can also help mitigate the effect of ageing on labour supply.
To reignite productivity growth in the EU, a comprehensive and coordinated approach across multiple policy areas is essential.
As highlighted in the report by Mario Draghi on The Future of European Competitiveness, investing in human capital, closing the innovation gap with the US and China, particularly by fostering radical innovations that disrupt existing industries are critical. Investments in research and development are essential as they drive innovation and technological advances. A well-educated labour force is a pre-requisite for promoting and spreading innovation throughout the economy. Addressing skill shortages is also key to remove barriers to innovation and facilitate the adoption of new technologies. The European Social Fund Plus can play a crucial role in financing investments in jobs and skills, while the Just Transition Fund facilitates the economic diversification and reconversion of territories most negatively affected by the transition to climate neutrality. The implementation of national recovery and resilience plans, supported by the Recovery and Resilience Facility, is also essential for advancing R&D in green and digital technologies while improving human capital. As stressed by President von der Leyen in her political guidelines and the report by Mario Draghi on The Future of European Competitiveness, education and training systems must adapt to evolving skill needs, especially in sectors vital for the twin transitions. A stronger emphasis on adult learning and vocational training is essential to up-skill and re-skill the workforce, maintain human capital in ageing societies and boost competitiveness.