Since 2019, EU employment has increased by 5.5 million people despite economic challenges
In recent years the EU labour market has shown remarkable resilience amid challenges including the COVID-19 pandemic, Russia’s war of aggression against Ukraine and the ensuing energy crisis, as well as ongoing structural changes linked to demographic change and the green and digital transitions. Since 2019, employment has increased by about 5.5 million people, whereas the labour force grew by roughly 4 million, resulting in a decline in unemployment by 1.4 million. The EU unemployment rate has hovered around an all-time low of 6% since early 2022 while in the euro area it has steadily declined, reaching a record low of 6.4%. Despite a substantial rise, the employment rate in the second quarter of 2024 was still about 2 percentage points below the 78% target for 2030 as set by the European Pillar of Social Rights Action Plan.
The increase in the EU labour force has been the main driver of employment growth
The labour supply has increased significantly in the post-pandemic period, with labour force growth accelerating from an average of 0.3% per year between 2015 and 2019 to nearly 1% in 2022 and 2023. This was driven by increases across all age groups and countries, with non-EU nationals contributing 1.24 million to the 2023 total labour force rise of almost 2 million people. In a context of prolonged labour shortages, non-nationals have helped alleviate labour and skill shortages. At the same time, firms have retained more workers than needed, probably in anticipation of a future economic recovery, despite the slowdown.
The labour market also seems to have benefited from some structural improvements…
The favourable developments in the labour market may also reflect structural improvements in its functioning. Notably, matching between job seekers and vacancies has improved, as evidenced by the low long-term unemployment rate. This partly mirrors the determined policy response during the COVID-19 pandemic that prevented the scarring effects of unemployment, as well as some closing of the gap between job seekers’ skills and the needs of employers.
… but in the medium-term, low productivity growth could jeopardise these favourable trends
However, challenges remain that could undermine the currently favourable labour market trends and the EU’s competitiveness. In the near future, declining profit margins and reduced vacancies may lower labour demand and raise unemployment. Moreover, the persistently low labour productivity growth in the EU undermines competitiveness, questions the capacity to finance the European social model, and could also hinder future job creation. In this context, the report by Mario Draghi on The Future of European Competitiveness emphasises substantial gaps in the EU’s high-tech specialisation, innovation, and investment, particularly when compared to the United States. In addition, persistent labour and skills shortages, particularly in occupations relevant for the green and digital transitions, may slow technology adoption, increase costs and reduce labour demand. Finally, ageing may also hold back productivity growth and aggravate labour and skills shortages in the future.
Measures are needed for boosting productivity growth and tackling labour and skills shortages
To maintain strong labour market outcomes and boost sustainable growth, a well-designed mix of policies is needed, many of which are outlined in the European Pillar of Social Rights’ action plan. A new industrial strategy aiming at fostering innovation, mobilising public and private investment and removing administrative barriers is crucial for reigniting productivity growth. Initiatives to promote innovation and improve infrastructure are already key components of Member States’ Recovery and Resilience Plans. Moreover, effective education and training systems are essential for upskilling and reskilling the workforce and supporting the adoption and diffusion of new technologies. In the context of an ageing population, harnessing the potential of underrepresented groups in the labour market and attracting talent from non-EU countries, particularly in shortage occupations, is also key to tackle labour and skills shortages, as emphasised in the EU action plan adopted in March 2024.Through the European Social Fund Plus+, the EU also supports investments in jobs and skills across Member States.
Real wages have rebounded since mid-2023 but social effects of the high inflation period persist
Nominal wage growth in the EU has been robust over the last 2 years but has started to moderate. On an annual basis it reached 5.0% in the second quarter of 2024 (4.3% in the euro area), which remains high, but below the rates reached in 2023. As a result, and also thanks to lower inflation, real wage growth, which had been negative since the end of 2021, turned positive again in the third quarter of 2023, reaching 2.4% year-on-year in the second quarter of 2024 (1.8% in the euro area). This has enabled real disposable household income to increase and households to recoup some of the purchasing power losses experienced since 2021. However, real wages in 2024 are still forecast to be 1.1% below their 2019 level in the EU. Many low- and lower middle-income households still feel the adverse effects of the high inflation period on their purchasing power. In particular, material and social deprivation and financial distress of workers remain elevated compared to levels before 2022.
Minimum wage increases have supported the low- wage earners’ incomes
While income inequality remained broadly stable on average in the EU, in 2022 low- and middle-income households suffered from a sharper decline in real incomes than higher-income deciles did in most Member States. In contrast, in 2023 low-income households experienced smaller decreases in their real incomes than higher-income households did. This is notably thanks to the large increase in statutory minimum wages that helped mitigate real losses for low-wage earners.
Scope for wage increases may exist in some Member States in the short term…
Evidence points to some remaining room for wage increases in some Member States and sectors in the current context. Inflation expectations stay moderate, mitigating the risks of a wage-price spiral. In addition, corporate profits remain high in some sectors, despite their recent decline, suggesting that they may still be able to absorb some further wage expansion without fuelling inflation. Furthermore, wage moderation in the last decade in many Member States that faced competitiveness gaps resulted in some rebalancing in cost competitiveness, particularly in the euro area. Wage growth has also been below predictions based on developments in its main macroeconomic drivers (inflation, productivity growth, unemployment and trade) in about half of the Member States over the last 10 years. In some countries, further room for wage increases exists, which could help address remaining social challenges.
… but higher productivity growth is also needed to sustain stronger wage growth in the future
More specifically, high wage growth in recent years has raised cost competitiveness concerns in some Member States, including Bulgaria, Estonia, Croatia, Latvia, Lithuania, Luxembourg, Hungary and Romania, reducing their scope for further wage increases, unless productivity growth accelerates. On the other hand, some Member States, including Greece, Spain, Italy, Cyprus and Malta have shown favourable competitiveness dynamics, accompanied by high unit profits in some of them, which may give them some more room for wage increases in the short term. However, low productivity growth and competitiveness concerns, if unaddressed, can weigh on sustainable wage growth over time in many Member States.
A well-designed combination of policies is needed to support fair and sustainable wage growth
To allow sustainable wage growth, policies should focus on boosting productivity and helping workers gain the skills needed to get higher wages, while supporting the most vulnerable. Well-functioning product and labour markets, as well as sound fiscal and monetary policies, are key in this context. It is also necessary to overcome the gap in high-tech specialisation, innovation and investment, and to reduce administrative burdens as well as barriers to the scaling-up of firms, as also highlighted in the report by Mario Draghi on The Future of European Competitiveness. Against this backdrop, the Clean Industrial Deal, announced in the political guidelines of President von der Leyen for the next European Commission, will support competitive industries and high-quality jobs. Moreover, enhancing the bargaining power of workers, including through effective collective bargaining, will help workers reap the benefits of productivity gains. At the same time, promoting adequate minimum wage protection, in line with the directive on adequate minimum wages in the EU, will continue to play a key role in supporting the purchasing power of low-wage earners.
Supporting the activation of older people can contribute to mitigating the impact of an ageing workforce
The EU labour supply is expected to decline by 0.3% per year until 2070, as a result of population ageing. If left unaddressed, this trend may put increasing pressure on public budgets and further exacerbate labour shortages, thereby weakening the EU’s competitiveness and hampering the twin transition. Activating underrepresented groups in the labour market, including older people, can help to mitigate the adverse impacts of a declining workforce. The activity and employment rates of persons aged 55 to 64 have increased significantly since 2009 (both by 20 percentage points). Nevertheless, they are still lower than those of prime age workers (by 20 and 18 percentage points, respectively), suggesting that there remains untapped potential for further activation.
Older persons are underrepresented in the EU labour market for a variety of reasons
The increase in older workers’ employment has been driven mainly by higher retention rates, while their hiring rates have remained low. Older people are less likely to participate in the labour force not only due to illness and disability, but also because of care responsibilities and workplace-related factors. Those with low educational attainment and people with disabilities are more likely to be inactive. Moreover, there is a large scope for activating older women, given the persistence of gender gaps in labour force participation and employment. Closing these gaps would also help to reduce the significant gender gap in pensions.
Adequate pension reforms can encourage older workers to stay employed for longer
In addition to raising the statutory retirement age and restricting the pathways to early retirement, reforms that provide financial pension benefits for those working beyond the retirement age and more flexibility to combine work and retirement can also promote longer working lives. Such adjustments to retirement systems should take into account gender, disability, and health, as well as the degree of job strain in certain occupations. Projections suggest that, mostly due to ageing and the anticipated impact of already adopted pension reforms, there will be an increase of 6 million people in the active population aged 55 to 64 and of 2.8 million in the active population aged 65 to 68 in the EU by 2030. Longer working lives promoted by flexible retirement options can contribute to improved pension adequacy, and thus also to quality of life in older age, as well as to intergenerational learning.
Policies targeting the most inactive groups are key to activating older people
Projections also show that women who have been outside the labour market for a major part of their lives, often due to informal caring responsibilities, and older adults affected by an illness or disability will still represent a large share of the population of inactive non-retired older people by 2030. Therefore, activation policies should be tailored to individual circumstances (as suggested in the Council Recommendation on the integration of the long-term unemployed into the labour market). In particular, policies that improve women’s labour market integration and support them to remain active after childbirth would also contribute significantly to higher employment rates of older women (e.g., the Council Recommendation on early childhood education and care). Activation policies targeting older people, particularly those with disabilities or severe illness, should consider cases where further labour market activity is not possible or desired.
Better working conditions and tailored training can support the employment of older workers
Several policies can empower older generations to remain active for longer, as outlined in the Demography Toolbox and in the Action Plan on labour and skills shortages in the EU. Other policies also aim to address the specific vulnerabilities and barriers they encounter. These include measures to ensure flexible working arrangements and reasonable accommodations at work for people with health problems or disabilities, in line with the EU Framework Directive on occupational safety and health. In this regard, collective bargaining can further promote adequate working conditions, helping to extend working lives. In addition, the employability of older people can be supported by tailored and inclusive training including through Individual Learning Accounts in accordance with the corresponding Council Recommendation. Furthermore, the enforcement of strong anti-discrimination policies, as required by the Employment Equality Directive, could also contribute to raising companies’ interest in hiring older workers.
