General labour market conditions in the EU and its Member States
Changes in the employment structure after the pandemic and implications for productivity growth
The long-term decline in manufacturing employment reflects structural change in advanced economies . As previously experienced by agriculture, rising productivity in manufacturing – driven by automation and technology – has reduced the need for labour while maintaining output (Graph 1.11) . Until 2017, productivity gains in manufacturing supported real wage growth, which boosted demand for services, which are typically less productive . In contrast, employment and valued added shares have moved closely together in wholesale and retail trade, suggesting weak productivity growth. Since 2018, this pattern has shifted. The share of value added in manufacturing has fallen faster than its share of employment, leading to a 0.7 percentage point annual decline in productivity since 2022. Unlike in the past, these losses have not been offset by gains in other sectors or by a shift toward more productive industries (Graph 1.11). As services take up a growing share of employment, future productivity gains – and therefore improvements in living standards – will increasingly depend on raising productivity within the service sector. As the recent evidence suggests, changes in employment composition are not necessarily linked to productivity gains.
Graph 1.11: Employment share and value-added share in industries and wholesale and retail trade: 2000Q1-2024Q4
Source:
Commission calculations on Eurostat, national accounts
The structure of employment is a key driver of economic growth. This section examines the labour market changes over the last decade focusing on the links between employment structure, productivity growth and earnings. These elements are interconnected and jointly shape a country’s economic performance. The sectors and occupations where employment expands or contracts matter, as they differ in productivity growth, wage levels, job quality and broader socio-economic features. Shifts toward higher- or lower-productivity growth sectors can influence overall growth. While wage growth generally reflects productivity trends, a disconnect between the two may signal inefficiencies, labour market mismatches, or weak bargaining power among workers in productive sectors. Understanding these interlinkages is key to assessing whether job creation is contributing to sustainable growth or if structural issues are holding back economic performance. Therefore, the analysis focuses on changes in the employment composition across sectors and occupations, categorised by different earnings and productivity growth. For this purpose, sectors and occupations are grouped in six categories based on two criteria: sectoral productivity growth of the last 20 years and current wage levels, leading to decomposition on low, medium, and high wage jobs, and low, high productivity growth sectors .
Assessing sectoral productivity requires acknowledging measurement challenges and the relevance of different sectors. The analysis in this section excludes public administration, defence, education and healthcare sectors, because in these sectors the measure of value added (which is the basis for productivity measurement) is based on the costs. In addition, while sectors such as water collection, treatment and supply or postal and courier activities have displayed low productivity growth over the last two decades, they remain crucial to society and may experience stronger growth going forward.
Graph 1.12: Shares of the 6 task-groups in the EU: 2023Q4
Source:
Own calculations based on LFS and SES.
More than half of workers earn low- to medium- wages despite being in high-productivity growth industries. In the fourth quarter of 2023, the low- wage, high-productivity growth and the medium- wage, high-productivity growth categories accounted respectively for 32.1% and 21% of business sector employment (Graph 1.12). In these groups, the largest sectors are respectively retail and wholesale . In contrast, high-wage, high-productivity growth jobs represented 10.5% of total business sector employment, concentrated in manufacturing of machinery and equipment and financial services except insurance and pension funds. Low-wage, low-productivity growth jobs made up 19.7% with key sectors including land transport and transport via pipelines, employment services and wholesale and retail trade and repair of motor vehicles and motorcycles. Finally, the medium- and the high-wage, low-productivity growth categories have shares of around 12.2% and 4.6%, respectively, covering natural monopolies or industries with high concentration rates and rents (such as gas and electricity) .
Graph 1.13: The occupational composition
Source:
Own calculations based on LFS and SES.
The occupational composition strongly correlates with wage levels. The high-wage, high-productivity growth group is dominated by managers and professionals, who make up 87.7% of the total share (Graph 1.13). A similar pattern is observed among those in high-wage tasks within low-productivity growth sectors. This suggests that certain tasks remain well-paid regardless of the sectoral productivity dynamics, indicating that factors beyond sector-wide productivity growth—such as specialised skills, intrinsic task value or possibly rents—play a crucial role in determining wages. In the medium-wage, high-productivity growth tasks, technicians and associate professionals account for 38% of the total, while craft workers make up 21%. A similar pattern appears in the medium-wage, low-productivity growth tasks, with a slight preponderance of professionals and craft workers. Low-wage tasks are concentrated among plant and machine operators, in particular in high-productivity growth industries, and service and sales workers. Elementary occupations and service and sales workers remain overrepresented in low-wage, low-productivity growth tasks.
Graph 1.14: Structure of employment by Member State in 2023 Q4
Source:
Own calculations based on LFS and SES.
The employment structures differ considerably across Member States. Luxembourg and Ireland have the highest share of high-wage, high-productivity jobs with 27.6% and 16.3% respectively, while Greece, Italy, and Romania have the lowest share with 5.8%, 6.5% and 7.4% respectively. Countries such as Slovakia, Hungary, Romania, Greece, Latvia and Poland have a high share of low-wage, high-productivity jobs at 35.3% and 35.6% respectively. In countries such as Denmark and Germany the distribution between the different categories is more balanced, with a strong presence of medium-wage, high-productivity jobs (23.1% and 24.4% respectively), indicating a highly productive base in manufacturing (Graph 1.14).
Between 2012 and 2023, there has been a major shift from low- to high-wage jobs accompanied by an increase in the share of employment in low-productivity growth sectors. The high-wage, high-productivity category saw the largest increase in its employment share, rising 2.5 pps over the period, though starting from a relatively low level, with a notable surge after the pandemic (Graph 1.15). In contrast, the low-wage, high productivity group experienced a sharp decline, by 4.5 pps, reflecting a broader shift away from low-paid occupations toward highly paid tasks in high-productivity sectors. This trend suggests an acceleration in demand for highly skilled workers in high-productivity sectors, likely driven by diffusion of new technologies, digitalisation, automation, and structural economic changes . At the same time, there has been a shift from high-productivity growth sectors to low-productivity growth sectors as a whole, by 2.4 pp since 2012 . Within low-productivity industries, employment experienced increases in the high- and medium-wage categories, by 0.6 and 1.1 pps respectively (Graph 1.15). There is high cross-country variability in these trends (Annex 1.2).
Graph 1.15: Structural shifts in employment - cumulative change in percentage points for each group in the EU
Source:
Own calculations based on LFS and SES.
The shift of employment to low-productive sectors appears to be driven primarily by adoption of new technologies and automation. In sectors with high productivity growth, fewer workers are needed to produce the same output, leading to long-term shifts of employment from high to low productivity growth sectors (Box 1). Despite the increase in the share of employment in high-wage, high- productivity growth category, over the last two decades, the share of employment in low- and medium-wage tasks in low-productivity sectors remained high at 32% and it has even increased between 2012 and 2023 by about 1 pp. At the sectoral level this concerns several labour-intensive services, such as warehousing, repair, courier, hospitality, recreational and amusement services. High productivity growth sectors are losing low-wage and medium-wage employment, while employment in low productivity sectors is expanding, with large differences across countries (Graph A1.2.3, Box 1). This represents a small negative persistent constraint on productivity growth and thus a challenge for economic growth and competitiveness.
Box 1.1: Structural changes and deindustrialisation - shifts in sectorial and accupational composition
There is strong evidence that the sectoral structure of employment shifts with the level of GDP per capita. As economies become more prosperous, the share of employment in agriculture declines, while the share in services increases (Herrendorf et al., 2013). The share of manufacturing, however, follows a hump-shaped pattern: it rises at lower levels of development and decreases as the economy advances to higher levels of development, which is an ongoing process in the EU. Both supply-side and demand-side processes were examined as drivers of these long-term structural shifts and deindustrialisation.
Sectoral or occupational shifts in the composition of employment can be driven by either supply or demand factors. One of the earliest examinations of supply side driven structural change is Baumol's (1967) two-sector model, which suggests that employment changes due to sector-specific productivity growth. In sectors with above-average productivity growth, employment declines and shifts to sectors with more stagnant productivity in the long run, because fewer workers are needed to produce the same output. This creates challenges for future productivity growth, as growth is “constrained not by what we are good at but rather by what is essential yet hard to improve” (Aghion, Jones, and Jones, 2019).
On the one hand, supply-driven models of structural change have been developed and expanded upon to better understand the dynamics of employment shifts. The simplicity of the Baumol's dichotomy between services and manufacturing has been often disputed, and modern supply-driven models with less strong assumptions and different types of supply-side differentiation between sectors have been proposed (Acemoglu and Guerrieri, 2008; Alvarez-Cuadrado et al., 2017; Ngai and Pissarides, 2007). The common conclusion of these supply-side models is that growth is constrained by the Baumol’s disease. More dynamic, more productive sectors exhibit decline of both employment and output prices, leading to rising share of both employment and value-added of more stagnant sectors.
Demand-driven approaches, on the other hand, explore how sector-specific consumption dynamics affect inter-sectoral changes in employment and output. In contrast to supply-driven approaches, demand-driven approaches derive the dynamics of structural change as a consequence of sector-specific final consumption dynamics. The core idea is that growth of individual income can change the consumption patterns, namely the relative shares of consumption dedicated to different sectoral outputs. This can be a factor in determining structural change (Engel, 1857; Foellmi and Zweimüller, 2006; Kongsamut et al., 2001; Pasinetti, 1983). According to the demand-driven approaches, deindustrialisation and shift to services is a consequence of a shift in consumer preferences.
These contesting interpretations of the ongoing deindustrialisation have important implications on understanding the boundaries of productivity growth. Baumol’s growth disease explains an important dynamic captured by the 6 decomposed groups, particularly shifts from more productive to less productive sectors in majority of jobs, particularly low and medium wage jobs (Graph 1.12). This implies that growth is increasingly constrained by increasing both employment and skilled labour in jobs that have exhibited less than average productivity growth. These challenges can be offset by the adoption of new disruptive technologies, like AI, which have the potential to fuel productivity growth in sectors that were more stagnant in the past, offsetting the problems of the Baumol’s growth disease (Aghion, Jones, and Jones, 2019). Lastly, improving export competitiveness and export shares can help maintain employment in sectors that are characterised by persistent high productivity growth (Lewis et al., 2021).
The increasing number of highly educated workers employed in low-productivity jobs may indicate that the available skills are not fully utilised. In 2023, 75.8% of high wage-high productivity workers had tertiary education reinforcing the importance of education in accessing well-paid, high productivity occupations. Conversely, the low-wage low-productivity category has the smallest share of highly educated workers (15.7%), and the highest share of low educated workers (31.6%) (Graph 1.16a). However, the educational landscape of the labour market has undergone significant changes between 2012 and 2023. The share of workers with high education has increased in most categories, especially in the high-productivity growth industries and in the medium-wage low-productivity category, with the latter experienced the large increase in relative terms (Graph 1.16b) . This leads to a larger share of highly educated workers being employed in jobs with lower productivity growth at similar wage levels. This trend potentially reflects an inefficient use of the available high skilled people, possibly due to occupational barriers, skill mismatches, or wage compression.
Graph 1.16: Employment structure of 6 groups by education
Source:
Own calculations based on LFS and SES.
As concerns non-EU citizens, there is a strong increase in the demand for occupations at both ends of the wage-productivity growth spectrum. More than 80% of non-EU workers remain in low-skilled, low-paying jobs, compared to 4% for the high-wage, high-productivity category (Graph 1.17) . However, the growth rate of the non-EU workforce was highest for the high-wage, high-productivity and low-wage, low-productivity categories indicating a U-shaped pattern of employment growth among non-EU nationals (Graph 1.17). This polarization in labour demand could be the result of better targeted migration policies and/or greater opportunities for non-EU citizens to access higher skilled, better paying jobs, due to improved recognition of their qualifications.
Graph 1.17: Distribution of non-EU-citizen workforce
Source:
Own calculations based on LFS and SES.
Overall, the EU labour market has undergone significant transformations over the past decade, but these changes only partially support the needs of a dynamic economy. Sustainable economic growth requires, inter alia, ensuring that more high skilled workers are employed in sectors that drive productivity and innovation . The rise in high-wage high-productivity jobs suggests a shift towards better-paying jobs and a more knowledge-intensive and innovative economy. A decline of low-wage high productivity jobs is also a broadly positive development, as it was driven by automation, productivity growth and improvements in educational attainment, creating positive spillovers in terms of available labour and skills. However, concerns related to an inefficient job structure remain, as over half of European workers remain in low-wage occupations (Graph 1.12), and an increasing share of workers is employed in low-productivity growth sectors. Additionally, the relatively high share of high-skilled workers in medium-wage low-productivity growth industries, suggests a growing skills mismatch and the increasing difficulty of the economy to absorb the highly educated workers. Without policies that boost productivity in services and that trigger demand for manufacturing goods, manufacturing employment is likely to continue declining.