Employment in Europe 2003: The Main Findings
Brussels 9-10-2003
The Employment in Europe report, published annually, presents a panorama of recent developments in European labour markets.This is the 15th edition of the report, and the first in which the acceding and accession countries have been almost fully integrated into the analysis. As in previous editions, there is a detailed statistical annex with key employment indicators, macroeconomic indicators and short-term projections. This background note highlights some of the particularly interesting findings of the report. References to charts and tables are in relation to the main text of the report.
Economic Context and Employment Performance
During 2002 Europe continued to feel the impact of the prolonged economic slowdown, low confidence and the uncertainty about the timing and strength of the US recovery, with average EU GDP growth of only around 1 percent in 2002. As a consequence, between the first and the second half of 2002, EU employment growth declined from 0.5 percent to 0.2 percent, and by the last quarter of 2002 had virtually reached a standstill. Meanwhile, by the first quarter of 2003 the unemployment rate had increased by 0.7 percentage points compared to the minimum reached in the second quarter of 2001, although, at 8.0 percent, it was still lower than the levels observed over the second half of the 1990s. By July 2003 the unemployment rate for the EU had increased to 8.1 percent.
The employment performance of the Member States in 2002 was somewhat mixed. In some employment growth had already become negative in the last quarter of 2001 while in several others it became so over the course of 2002. However, for most Member States average annual growth for 2002 still remained positive despite having slowed-down relative to 2001.
Due to strong domestic demand the acceding countries have experienced a more limited economic slowdown than the EU, but despite this overall employment has continued to decline, essentially due to negative employment growth in Poland. Unemployment has declined over recent years for most of the acceding countries, except notably in Poland where the rate has risen to close to 20 percent. Similar to the EU, employment growth in the acceding countries as a whole is expected to stagnate in 2003, but should see a slight improvement in 2004 to around the 1 percent level.
Until the first quarter of 2003, EU employment had not declined under the current slowdown, but may do so in the second quarter of 2003. The main adjustment so far has occurred in productivity and hours worked. For the EU as a whole there may not be much scope for containing the impact of the slowdown through further reductions in working hours if it continues, also the decline in productivity growth cannot continue unchecked for much longer. This raises the possibility of a more marked downward adjustment in employment levels in the course of 2003 unless a strong pick-up in the economy materialises soon.
The reaction of employment to the current economic slowdown has so far been more moderate than in the previous slowdown, reflecting a path of job creation and loss different to that of the early 1990s. Smaller declines in employment have occurred so far in agriculture and industry, while greater job creation has occurred in the services sector. This resilience has essentially been a consequence of the changes in the European labour market which occurred over the second half of the 1990s, where the interaction between rising female and youth participation, the increasing educational level of the workforce and greater availability of new types of contracts facilitated the development of an employment-intensive macro-economic regime.
Despite the weak economic growth, EU activity and employment rates have continued to increase, in particular for women, but at a much lower pace than in preceding years. In 2002 the overall employment rate rose by a modest 0.2 percentage points to 64.3 percent. This increase was driven by the rise in the female employment rate, which reached 55.6 percent, while the male employment rate declined slightly to 72.8 percent. The employment rate of older workers increased by about 1.4 percentage points to just above 40 percent, but still remains far below the 50 percent Stockholm target.
Productivity, Skills and Sectoral Mobility
In the second half of the 1990s employment growth compensated for the decline in productivity growth and allowed EU GDP growth to reach its highest rate for two decades.
Overall productivity growth reflects different sectoral productivity dynamics and different contributions of changes in the sectoral mix of employment. In the 1980s, changes in the composition of employment explained 20 percent of total labour productivity growth, while the contribution of productivity growth within sectors accounted for the remaining 80 percent. After 1995 the component of productivity growth due to change in the sectoral composition of employment accounted for about 30 percent of total productivity growth.
Compared to the US, Europe had higher productivity growth in the ICT producing services while the rate of productivity growth was lower in the ICT-using industries, which suggest the limited diffusion in Europe of new technologies in using services.
These findings have two major consequences:
- Firstly, the total productivity growth is limited without "pure" gains of productivity within sectors, in particular in those activities with production processes likely to be affected by the introduction of technologies with universal and far-reaching applications.
- Secondly, it shifts the attention from the quantitative effects of structural change to its qualitative nature. New technologies expand the role of knowledge in the production process, and, more importantly, make its diffusion a key component of growth. A high-skilled workforce not only contributes to reducing the implementation costs of new ways of production but also accelerates their adoption by the less well educated.
The report also presents an extensive analysis of the effects on sectoral productivity growth of the distribution of skills in the entire economy. The findings are the following:
- There are advantages from concentration of high-skilled people in industries characterised by intense patterns of innovation. This implies that industries with strong growth opportunities, such as high tech industries, with a significant number of high-skilled people should perform better than the same type of industries employing a relatively lower number of skilled people.
- Important knowledge spillovers may also occur for those activities with less specialised applications where the scope of the application of knowledge is broad, in particular in the services sector. Both technologically advanced and less technologically intensive sectors may benefit from both an increasing number and greater mobility of high-skilled people.
Improving Productivity and Wage Structures
The new generation of Broad Economic Policy Guidelines and Employment Guidelines has highlighted the importance of wages, labour costs and productivity. Against this background, this year's report analyses wage structures and determinants in an enlarged EU. The main findings are:
- While the tax burden on low paid labour needs to be reduced to foster employment creation, there is no simple relation between non-wage labour costs and total labour costs, because the relative size of net wages, taxes and social security contributions differs significantly across countries. In fact, the two countries with the highest gross hourly labour costs in Europe - Sweden and Denmark - are respectively the countries with the highest and lowest share of non-wage labour costs.
- There is evidence of significant wage differentiation across skills, firms and sectors. While generally more pronounced in the service sector, the extent of sectoral wage differentiation differs significantly across countries. In some cases, relative wage structures do not create appropriate incentives to attract people into economic activities that are key to productivity and economic growth such as research and business services. Wage differentiation across regions is much less pronounced.
- Wage bargaining systems in current and future EU Member States allow wages to reflect productivity effectively, notably taking into account differences in skills. In some Member States, wage growth has also been slow to adapt to productivity developments.
- But productivity is not the only determinant of wages. Traditional seniority- and tenure-based pay schemes persist and provide effective insurance against wage variations and employment risks. Furthermore, gender pay gaps which cannot be explained by differences in productivity persist in all EU labour markets.
- On the other hand, there is a considerable degree of flexibility in the way European wage formation systems reflect differences in skills, but also factors as diverse as contract status, firm size, career interruptions, earnings risks and, although to a lesser extent, local labour market conditions. The extent to which these factors impact on remuneration levels differs considerably across the EU Member States.
- There is little evidence of any effective compensation of employment risks by means of additional wage premia. Only in the UK do employment risks seem to be compensated for to some extent by higher wages. In other countries such as Denmark or Spain, no link can be established between wages and employment risks. Furthermore, in some Member States - notably France, Italy and Germany - there is evidence of quite strongly segregated labour markets, where those with the highest employment risk also face lower wages.
- With the deepening of an enlarged single market and the EMU, there is a need for further labour market adjustments. Labour markets will have to increase their capacity to adapt and to manage structural change, including reforms of pay structures. Moving to more flexible labour markets will be facilitated by the further development of unemployment insurance systems and active labour market policies.
Flexibility, Security and Quality in Work
Efforts to promote more flexible work organisation and facilitate labour mobility, both geographical and occupational, while taking into account the need for job security, is another key element of the new generation of Employment Guidelines. An appropriate balance between flexibility and security helps to support the competitiveness of firms, increase quality and productivity at work and facilitate the adaptation of firms and workers to economic change. Against this background, this year's report analyses working hours and working time arrangements, labour market dynamics and quality in work. The main findings are:
- For some Member States, little or no significant changes in the dimensions of quality in work covered in the report can be found. And this despite a relatively strong employment performance over the second half of the 1990s. Up to a quarter of Europeans remain in jobs of relatively low quality. In particular the share of low-skilled employees in comparatively low paying jobs continues to vary remarkably across EU Member States, ranging from less than 30 percent in the Netherlands, Finland and Italy to more than 50 percent in Germany.
- On the other hand, there have been improvements in transition rates out of low quality employment in some Member States with quite favourable labour market transition patterns - notably Denmark, Ireland, Austria, Belgium and the Netherlands. While transition patterns also improved considerably in Spain and France, the overall career opportunities of people in low quality jobs in these countries remained largely below average. Persistence in low quality employment remained highest in the UK, but was low with regard to unemployment. Persistence in unemployment remained strong in several Member States.
- As regards flexible working arrangements, there is a wealth of such arrangements in European labour markets, including contractual and working time arrangements. 18 percent of European employees work part-time. 13 percent work in temporary jobs - more than half of them involuntarily, and more than one third of them with a contract length of 6 months or less. 15 percent of European employees regularly work overtime hours - more than half of them unpaid. One quarter of all employees - notably services and sales workers, skilled manual workers and unskilled workers - regularly work more than the core hours. Finally, 8 percent of all full-time employees in the EU - and more than 20 percent in the UK - usually work more than 48 hours a week.
- There is also a considerable amount of movement between labour market states over time, both within a given year and over a period of several years. For men, continuous employment over the second half of the 1990s was most common in Austria, Denmark, Luxembourg and Portugal, where more than 60 percent of the men were in employment in all years. Persistence in employment was lowest in Germany, Finland, France, Italy and, most notably Spain, where only half or less of all men were in employment in all years, or, in other words, where half or more of all men were in unemployment or inactivity at least once in the second half of the 1990s. The countries in which at least 70 percent of all women were employed in some year include Germany, the UK, Portugal, Austria, Denmark and Finland. Only in the latter three were more than 40 percent continuously employed throughout the period 1994-99. Persistence in inactivity was highest for women in Spain, Italy, Ireland, Belgium and Luxembourg.
- When looking at employment stability within a selected year (1998), the UK is found to be the EU Member State with the highest share of people who were in employment at least some time in thatyear, 77 percent of men and 65 percent of women. On the other hand, countries such as Greece, Italy and Spain - as well as Belgium for men and Ireland for women - involved far fewer people in the labour market, with less than two thirds of men and 40 percent of women at most employed some time in 1998. Together with Portugal, the UK is also the country with the highest share of people - both men and women - continuously employed throughout the whole of 1998. Continuous employment rates were, on the other hand, particularly low for men in Finland and Spain - with half or less of all men continuously employed in 1998 and for women in Ireland, Italy, Greece and Spain where less than 40 percent of women were continuously employed. In fact, only in Denmark, Finland, France, Portugal and the UK did the share of women in continuous employment exceed that of women in continuous inactivity over the year 1998. In Belgium, Luxembourg, Ireland, Italy, Greece and Spain, more than half of all women remained outside the labour force throughout the whole year.
- Similar shares of people in employment at some point in time throughout a given year might well hide important differences in employment patterns within a year. In countries such as Germany, Austria and Denmark, for example, similar shares of men (around 71 percent) were actually in employment at some point in 1998. In contrast to Denmark and Austria, however, in Germany there was significantly more fluctuation between labour market states. The highest shares of 10 percent or more of people with varying labour market states over the year is found in Germany, France,Spain, Finland, Ireland and the UK for men, and in Germany, Denmark, France, Finland, Spain, Ireland and the UK for women. These labour market fluctuations were generally higher among women than among men - with the exception of Germany, Austria, Ireland, Italy and Spain.
- The impact of higher labour market fluctuations on the overall employment rate is unclear, though, as labour market transitions may have a different impact on employment performance in different countries and circumstances. In the case of the UK and Denmark, for instance, relatively high fluctuations go hand in hand with high overall employment rates and comparatively high employment stability. This seems to be different in the case of Germany, France, Ireland, Finland and Spain, where large fluctuations are linked to comparatively lower employment rates. In Portugal and Austria, furthermore, high employment rates coincide with relatively low fluctuations between the various labour market states.
Ageing and the Labour Supply of Older Workers
The rapid ageing of the EU population and low employment among older workers (those aged 55-64), partly due to the extensive use of early retirement schemes in the past, together with low fertility rates and increasing life-expectancy, will negatively affect the ability to finance pension and health care systems. These developments also put increasing pressure on those in employment to be more productive in order to ensure rising living standards for the whole population.
At the same time, the employment patterns of young and older workers are similar. Older workers are not concentrated in declining sectors, but in knowledge intensive and growing sectors. Sectoral employment growth for young and older workers in particular moves in the same direction. They are thus not employment substitutes for one another, but rather complement each other.
Increasing participation and employment of older people will therefore be crucial. The EU has therefore set itself two important objectives to be achieved by 2010: to increase the employment rate of older workers to 50 percent (Stockholm target) and to delay by five years the age at which older workers stop working (Barcelona target). In 2002 the employment rate for older workers in the EU15 stood at 40 percent, while in 2001 the average exit age from the labour force was 59.9 years.
Meeting the Stockholm target for the EU15 would require an increase in employment of those in the 55-64 age group by 7 million between 2002 and 2010 (900,000 a year). Although 2002 showed a marked improvement in employment for older workers, between 1997 and 2001 the EU only managed a rate of about 250,000 a year. Some Member States, including Finland, the Netherlands, Denmark and Ireland, managed to improve the employment situation of older workers considerably. From other Member States, notably Italy, Austria, Germany, Luxembourg and Greece, greater efforts should be encouraged to reach the Barcelona targets.
The employment rate for high-skilled older workers (61 percent) is twice that for the low-skilled (31 percent). Low-skilled workers leave the labour force earlier (some three years on average) than their high-skilled counterparts. At EU level, the average exit age for the high-skilled was 62.3 years in 2001, compared to 58.7 years for low-skilled workers. It has to be noted, however, that this difference in average exit ages from the labour market between low- and high-skilled does not reflect a shorter employment career for the low-skilled, but is due to the fact that their working life generally starts some years earlier than for the high-skilled.
The average employment rate for older people in acceding countries (30 percent) is much lower than in existing Member States (40 percent). Moreover, disparities in the employment rates between high- (56 percent) and low-skilled older people (19 percent)in these countries are more pronounced than in the current Member States. Older workers in acceding countries also withdraw earlier from the labour force than in most of the existing EU Member States. Special efforts are therefore also needed in the future EU Member States.
As main problems related to employment of older people, the report identifies the following:
- Firstly, work-related health problems increase with age. Musculo-skeletal disorders mostly concern low-skilled occupations, whereas the incidence of stress-related health problems is more predominant for high-skilled, non-manual occupations.
- Secondly, there is a strong need for more flexible working time arrangements for older workers. The increase in employment of older workers in recent years is related to the higher incidence of part-time work. At the EU level, half the employment creation for older workers is accounted for by increases in part-time employment, which now represents about 22 percent of their total employment.
- Thirdly, older workers receive significantly less training than prime-age workers, particularly so if they are low-skilled. This is partly because employers assume that they will not be in the labour force long enough to benefit from expected productivity increases.
Key dimensions for improving the employment situation of older workers therefore are:
- improving working conditions and paying more attention to health and safety in the workplace;
- promoting more flexible working time arrangements as a way of achieving a good balance between work and private life in line with the needs of older people; and
- increasing training for older workers and keeping them longer in the labour force, together with measures to discourage early retirement
Immigration, Integration and Employment
The Employment Guidelines highlighted the need to address labour shortages and bottlenecks through a range of measures, including the promotion of occupational mobility and removing obstacles to geographic mobility, taking into account labour market aspects of immigration. The Thessaloniki European Council stressed the need to explore legal means for third-country nationals to migrate to the Union, taking into account the reception capacity of the Member States, within the framework of an enhanced co-operation with the countries of origin that would prove beneficial for both sides. It also called for an accurate and objective analysis of these issues, to help develop and promote policy initiatives for more effective management of migration in Europe, contributing to an improved integration of established migrants.
Over the last two decades, immigration of foreign nationals into the EU area has increased steadily, reaching an absolute annual level of immigration higher than that of the US. In Northern Europe the main reason for immigration is the re-uniting of families, while in the south it is the search for employment.
There are important differences in the proportion of immigrants in EU Member States. A significant number of them are likely to be undeclared, as indicated by the numerous legalisation operations carried out by Member States. The integration of non-EU nationals into the European labour market also varies widely depending on the host country and the country of origin. Furthermore, the skill composition of immigrants has recently changed towards more high-skilled immigrants.
In 2002, the employment rate of non-EU nationals was about 14 percentage points lower than that for EU nationals (10 percentage points for men and 17 percent points for women). The gap was wider for prime-age workers than for the young and the older workers. The unemployment rate of non-EU nationals was more than twice the rate for EU nationals. Non-EU nationals, particularly women, are also at a disadvantage in terms of wages. The whole distribution of migrant workers tends to be skewed towards low skills, possibly explaining their over-representation in specific sectors.
The relative labour market situation of non-EU nationals has not improved after the deterioration experienced in the 1993/94 recession. It worsened even further for older and low-skilled workers. Migrant women are also lagging behind in terms of labour market integration, except in Southern Europe. While the high-skilled migrants reduced their employment gap with respect to EU nationals, it nevertheless remains higher than for any other educational group. The high percentage of early school leavers among non-EU nationals (35.1 percent versus 16.7 percent for young EU-nationals) is of particular concern as it hampers their adaptability to structural change and the integration of future non-EU national workers.
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