Labour market developments in Europe, 2012

The EU labour market in 2011 was marked by a sudden interruption of the recovery in employment started in 2010. Employment started falling in the mid of 2011 amid a reduction of job finding rates and a new process of job shedding concerning most of the EU, with job separations surging in a few countries. The current weakening of the labour market is mostly the result of worsening economic activity linked to the deterioration of the sovereign crisis amid an increasingly uncertain economic environment. The overall unemployment rate of the EU is currently heading towards nearly 10.5%, that of the euro area is about 11%, the highest rate since the start of EMU.

The dispersion of unemployment rates within the euro area is at unprecedented levels. It has been growing since 2008 and is mostly explained by worsening unemployment in the countries most concerned by the sovereign crisis and external imbalances. The growing unemployment divergence within the EU is partly the result of different response of unemployment to growth.

The evidence indicates that in many EU countries unemployment is becoming increasingly structural: the duration of unemployment is increasing amid persistently low job finding rates, and the matching on the labour market is becoming less efficient. Although activity rates remained resilient in most countries despite the persistent labour market slack, looking forward there is a risk that marginally-attached workers could start leaving the labour force.

Overall, wage moderation has prevailed across the EU, with real wages often growing below productivity. Wage dynamics started more clearly reflecting different needs for adjusting labour costs to re-balance external positions, with more moderate growth rates in nominal compensations recorded in countries recording current account deficits.

On the positive side, since the start of the crisis EU countries have moved to a more active reform stance, broadly in line with recommendations put forward at EU level. In particular, a number of EU countries with a more acute unemployment problem and stronger needs to regain competitiveness have recently take courageous steps to reform their labour markets with a view to improve its dynamism and adjustment capacity.

Looking forward, momentum towards reform should be kept in the countries with the highest unemployment, including via an effective implementation of recent legislation. Other major challenges include that of preventing hysteresis and avoiding unemployment becoming entrenched, keeping activity rates, fighting precariousness and job insecurity, easing the transition from school to work for the young, and improving the effectiveness of social safety nets.

The report includes two analytical focuses:

+ A decade of labour market reforms in the EU: trends, main features, outcomes;
+ Macroeconomic implications of Employment Protection Legislation.

DOI: Labour market developments in Europe 2012 http://dx.doi.org/10.2765/18924

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