The EU labour market, which has been remarkably resilient over the past years, has started to slow.
In recent years, the EU labour market has shown remarkable resilience, with strong employment growth and historically low unemployment rates, despite weak economic growth and ongoing structural transformations. However, in 2024, the labour market showed signs of deceleration, with employment growth slowing to 0.8% from 1.2% in the previous year. Moreover, the recent shift in US trade policy is expected to adversely affect employment, both through heightened uncertainty and the imposition of higher tariffs on EU exports. The impact of tariff hikes is estimated to be unevenly distributed across sectors, reflecting their different exposures to the US market. Pharmaceuticals are likely to face the largest relative job losses, while wholesale and retail trade are expected to experience the greatest absolute employment decline.
Weaker employment growth coincides with a rise in restructuring announcements in key sectors.
In this context, announced job cuts due to restructuring are increasing, particularly in capital-intensive industries such as automotive, telecommunications, electrical equipment and pharmaceuticals, which have traditionally witnessed high productivity growth. The employment slowdown is more significant in countries with large manufacturing sectors, such as Czechia, Germany, Hungary, Romania and Slovakia, where employment is stagnating or declining.
Boosting productivity requires innovation and upskilling.
Since 2018, the share of manufacturing’s added value has declined faster than its share of employment, resulting in lower productivity compared with the rest of the economy. The declining role of manufacturing as an engine of growth is a notable change from historical patterns. This in turn has increased the reliance on the services sector to sustain productivity growth. Tackling low productivity growth requires faster technology adoption and a stronger focus on innovation and knowledge-driven activities. Policies can play a crucial role in supporting the upgrading of workers’ skills and promoting job creation in future-oriented occupations and industries.
Changes in job composition have supported productivity growth, but challenges remain.
Despite the overall decline of manufacturing, high-skilled, high-paying jobs in high-productivity growth sectors such as pharmaceuticals and telecommunications have grown by nearly one-third since 2012. At the same time, low-skilled, low-paid jobs in manufacturing and retail have declined due to automation, capital investment and increasing skill levels. However, nearly one third of jobs remain in low- and medium-wage jobs in low-productivity growth sectors such as transport, hospitality and domestic services. While these sectors have experienced limited productivity gains in the past decades, they remain essential to society and are key to ensuring a dynamic and inclusive economy. At the same time, the increasing presence of highly skilled workers in low-productivity sectors may signal an inefficient use of human capital.
While real wages have improved, ensuring they are adequate remains a challenge.
Real wages began recovering in the second half of 2023, after their sharp decline between the end of 2021 and the first half of 2023 due to high inflation. Growth accelerated in 2024, with real wages in the EU rising by 2.7%. In 2025, they are set to exceed their 2019 levels, except in a few Member States. In one third of Member States, real wages now significantly surpass pre-pandemic levels. In contrast, in Czechia, Germany, France, Italy and Finland they have yet to recover. Skills and labour shortages are driving up wages for some workers, but real wage growth is expected to slow down markedly. Overall, the risk that wage growth would trigger sizeable inflationary pressures is low. Over the medium term, low productivity growth, economic uncertainty and less tight labour markets will continue to constrain broader wage growth. In this context, ensuring adequate wages, a key component of job quality, remains a high policy priority.
The relative situation of low-wage earners has improved since the pandemic…
Since the COVID-19 pandemic, low-wage earners have experienced positive developments. Narrowing disparities between them and other workers, in terms of both disposable income and wages, are reflected in the decline in in-work poverty and the share of low-wage earners. This improvement is largely due to emergency support measures during the pandemic and energy crises, along with significant minimum wage increases in many Member States. The latter have also boosted some wages to slightly above the minimum wage.
… but the middle class has become more vulnerable.
At the same time, since the pandemic, lower-middle and middle-wage earners, typically the core of the middle class, are increasingly struggling to afford basic goods and services. Many of these workers have not benefited from recent minimum wage increases or support measures. Their situation has worsened in most higher-income Member States where declines in real wages have been followed by a weak recovery in 2024. By contrast, in Member States where real wages have sizeably exceeded pre-pandemic levels, both low- and middle-wage earners have seen improvements.
Wage adequacy and productivity can reinforce each other – but this is not automatic.
To improve wage adequacy, enhancing productivity is essential, as it allows wages to grow without harming competitiveness. The EU continues to face persistently weak labour productivity growth, which limits the potential for higher wages. Higher wages can help to boost productivity in some cases, by increasing workers’ motivation and driving companies to innovate. Rather than relying solely on low costs to promote competitiveness, strengthening non-cost competitiveness, such as product quality, can support wage and productivity growth at the same time. However, stronger productivity and wage growth together do not guarantee that all workers benefit adequately. Without safeguards, wage disparities across workers may increase, for instance through job polarisation.
Well-designed job retention schemes can safeguard employment and income during downturns.
Policies that protect jobs during downturns are crucial. Job retention schemes help to prevent unemployment spikes, maintain employment contracts and support incomes during crises. During the COVID-19 pandemic, the effectiveness of these schemes was demonstrated by their widespread use, which was financed partially through the EU’s Support to mitigate Unemployment Risks in an Emergency (SURE) instrument. Active labour market policies, including skills training, employment incentives and job search assistance, are an important tool to support workers in job transitions during economic shifts.
During the pandemic, broad eligibility and simple administrative procedures boosted participation in job retention schemes.
During the pandemic, simplified administrative procedures and broad eligibility for companies and workers boosted participation in job retention schemes and helped to preserve employment. By contrast, conditions like mandatory training or dismissal bans reduced companies’ participation, despite being beneficial for workers. At the same time, although broad coverage helped job retention, it was associated with lower productivity after two to three years.
Job retention schemes must balance job preservation with necessary employment adjustment.
The extensive use of job retention schemes during the pandemic offers important lessons for the future. They are most effective during temporary downturns, helping employers retain their employees. Their design must carefully balance employment preservation with the need for efficient resource reallocation. When used, these schemes should therefore target the most affected companies and workers, while avoiding long-term support for non-viable jobs in inefficient firms. As conditions improve, they should be gradually phased out to allow job reallocation. Permanent and flexible job retention schemes that can be rapidly activated during crises can boost economic resilience and adapt to emerging challenges. Furthermore, the involvement of social partners in their activation can help to ensure the adequate targeting and fair sharing of costs between relevant stakeholders. Finally, employers’ co-financing and experience ratings can limit their overuse.
When used during restructuring, job retention schemes should be accompanied by active labour market policies.
Recently, the use of job retention schemes has increased due to signs of a labour market slowdown, as well as structural shifts related to the green and digital transitions. These schemes, together with company restructuring plans and targeted training, can help workers to remain employed during companies’ restructuring and support their reskilling and upskilling. However, when companies cannot restart their business after restructuring, such schemes may slow necessary job changes. To support workers in moving to new jobs, job retention schemes should be complemented with active labour market measures, such as training, tailored job search assistance and employment incentives.
EU policies support the shift towards high-productivity jobs while ensuring quality jobs and wage adequacy.
To foster high-quality jobs, wage adequacy and innovation-driven growth, the EU promotes policy measures and reforms aimed at raising productivity, upgrading skills and facilitating job transitions. Several EU initiatives are paving the way toward an innovation-centred growth model. The Competitiveness Compass seeks to reduce regulatory barriers and enhance investment in research and development (R&D), digitalisation and strategic sectors. The Union of Skills supports training and smooth job transitions. Initiatives such as the Skills Guarantee Pilot and the extension of the European Globalisation Adjustment Fund may also help workers adapt. Enhancing job quality is crucial, in particular for low-wage workers in sectors with low productivity growth. This will also help alleviate acute labour shortages in these sectors. Moreover, boosting employment and wage adequacy, while preserving competitiveness requires a range of policies to promote non-cost competitiveness, innovation and investment. It is also essential to ensure that all workers benefit from productivity gains, with minimum wages and collective bargaining playing a central role in protecting vulnerable workers, as highlighted in the Minimum Wage Directive. The forthcoming Quality Jobs Roadmap will further support adequate wages, good working conditions and fair job transitions for both workers and self-employed people.
