Labor Markets in EU8+2: From the Shortage of Jobs to the Shortage of Skilled Workers

Abstract

Unemployment has fallen substantially in virtually all EU8+2 countries since 2004 due to strong growth in labor demand. This labor demand growth has given rise to skill shortages and associated wage pressures, often amplified by out-migration. However, employment/working age population ratios are relatively low. In contrast to the earlier period of weak labor demand it is now the supply side of the labor market that constrains new job creation. Many persons of working age are economically inactive in EU8+2 either because they lack skills demanded by employers, or because of labor supply disincentives, such as early retirement benefits, high payroll taxes, or limited opportunities for flexible work arrangements. Hence the main challenge facing now EU8+2 is to mobilize labor supply to meet the demand. Addressing the emerging skills shortages is particularly important, because failure to do so will constrain to job creation and future economic growth. To increase the effective labor supply EU8+2 countries need to: (a) improve labor supply incentives through reforming the social security systems, (b) improve worker skills through reforming the educational systems; and (c) import labor with skills that are in short supply by opening labor markets to foreign workers. The weights assigned to each policy depend on the nature of the most binding constraint to labor supply, which vary across countries. The objective of this paper is to document the recent changes in labor market conditions in EU8+2, to suggest some tentative explanations for the observed trends and patterns, and to recommend policies to address the emerging challenges.

Keywords: EU new member states, unemployment, employment, labor market, skills shortages

JEL Classification: J21, J23, J63, J64, P23, O52