European Labour Market

In relation to the demographic profile of the the European labour market, significant changes have occured in recent years. There has been an increase in women in the labour force over the last decade, with the gender gap between men and women falling from 17.1 percentage points in 2000 to 14.2 percentage points in 2007. There has been changes in migration patterns from the accession of the new Member States in 2004 and in 2007 as it has utilised the right to free movement of workers to encourage changes in the national and ethnic profile of the European labour market. Demographic changes associated with an aging labour force have also necessitated new labour market incentives to promote older workers to stay in the labour force longer.

Some of the notable changes in the European labour market are listed below:

• Progress has been made in raising employment rates, but the Lisbon employment targets will not be met by 2010 because of the mid-decade ‘wasted years’ of sluggish economic growth.

• Unemployment has come down to levels not seen for a generation. Yet it remains higher than in theUSand the non-EMU western European countries.

• In spite of lower unemployment and higher inflation, wage setting remains moderate and consistent with price stability in EMU as a whole. But this also means that national income continues to be shifted from wage to profit income, depressing the wage share.

• At the same time, divergences between countries unit labour cost developments have led to competitive tensions within the currency union.

• The euro area has a productivity problem. Contrary to standard arguments about the productivity-enhancing effects of market-oriented structural reforms, labour productivity growth has been sluggish. While the reasons are complex, we identify the weakening of collective bargaining, which has reduced the pressure on firms to rationalise production, as an important cause.

• Regarding job quality, there are a number of important areas of concern. Involuntary part-time work and the use of fixed-term contracts have increased inexorably. In a number of countries, but not all, wage inequality has increased dramatically. Specifically the share of workers inGermanyand theNetherlandsearning less than two thirds of the median hourly wage is now almost as high as in theUSA.

• A quantitative analysis of job quality in the EU15 using fifteen separate indicators suggests a worrying decline in the areas of non-standard employment contracts and collective interest representation since 2000. Despite the shift to services and political statements of intent, there has been no improvement in ‘physical’working conditions or in indicators of ‘work-life balance’. Comparing countries on their overall performance, the Scandinavian countries come out top, along with theNetherlandsand theUK. The southern European countries perform worse. Worryingly the better-performing countries have improved their scores since 2000, whereas the laggards appear to have fallen further back.

Overall the analysis suggests a link between these developments. Returning to pay trends that are oriented towards medium-run productivity growth, particularly at the bottom end of the labour market, would be an important step towards raising workers’ living standards. It would help stop the trend to greater inequality, while serving to stimulate the rate of labour productivity growth on which, ultimately, rising living standards depend.

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