Skilled labour shortage will slow down European growth

After the summer holidays many children and youngsters are returning to school. They are often told that good education and training are essential for their careers. Macro-economically too, high-skilled labour is crucial for our welfare because of its role in the creation of products and services. Moreover, in the EU, we tend to believe that human capital is key to remaining competitive in a global environment. The current recovery in the European economy is depending to a large extent on skilled labour. Consequently, the latter is starting to become scarce. In the fastest growing EU economies this trend will slow down further economic development in the near future. In order to raise the European growth potential, we need more and faster investments in human capital development.

The financial crisis triggered a steep increase in unemployment figures in all western economies. Apart from increases due to business cycle effects, many countries, in particular within the EU, were confronted with structurally high unemployment. Thanks to the clear-cut economic recovery in recent years, the unemployment rate is coming down, while the employment rate is going up. Full employment is no longer unrealistic in a number of important economies, including the US, Germany and various Central European economies. It is often argued that scarcity arises gradually in the labour market which in turn tends to push up wages at some point in time. Higher wages are both positive and negative for our economy. On the positive side, an increase in purchasing power can stimulate growth. Moreover, higher wages will pass through into higher prices for goods and services prices, thus raising the currently low inflation rate and enabling monetary policy to be normalised. On the negative side, rising labour costs reduce our companies’ international competitiveness.

At the moment, wage growth remains subdued in the entire western world. This can be explained by low productivity growth, but also by public policies. Wage moderation has been high on the political agenda in many countries. European governments have watched each other’s wage developments, which has led to wage moderation policies safeguarding or improving their countries’ international competitiveness. In addition, a number of labour market reforms have put downward pressure on wages (including postponed retirement policies, decreasing taxes on labour, stricter allowance policies).

The overall labour market hides, however, substantial differences among employees, such as their educational attainment. Despite technological developments and far-reaching digitalisation, labour remains a very important production factor for our companies. Nevertheless, the demand for labour has become more oriented towards specific job profiles. Skilled labour is in high demand in our society that cherishes innovation and is undergoing structural changes. It is harder to use machines for assignments executed by high-skilled people than for routine jobs. Moreover, a high-skilled labour force is essential for innovative activities. Finally, high-skilled employees are needed to implement structural changes within firms. Hence, it is no surprise that the demand for skilled labour is growing rapidly. Consequently, the unemployment rate among high-skilled people is far below the average unemployment rate (figure 1). Moreover, the unemployment rate among high-skilled people is extremely low in many countries, pointing to scarcity in that particular labour market segment.

Figure 1 - Unemployment in EU countries: total versus high-skilled (2016, % of active population)

Source: KBC Economic Research based on Eurostat (2017)

We need to take account of a number of items when interpreting the recent trends in high-skilled unemployment in Europe. First, the high-skilled unemployment rate is not exceptionally low. Rather, it is following the general business cycle. For the entire EU, the high-skilled unemployment rate is currently higher than before the financial crisis (4.7% in 2016 versus 3.4% in 2008). Second, this general picture does not hold for all EU member states (figure 2). The unemployment rate for high-skilled people in strong performing EU economies is historically low. This holds in particular for Germany and most Central and Eastern European economies, followed by the small Western European economies (Benelux, Austria). Maybe surprising is the relatively high unemployment rate for high-skilled people in Northern Europe (Finland, Sweden, Denmark). Whereas in Southern Europe as well as in France it is clear that high-skilled employees are confronted with challenges in the labour market too.

Figure 2 - Trend in unemployment for high-skilled labour in a selection of EU countries (unemployment rate 25-64y with third-level education)

Source: KBC Economic Research based on Eurostat (2017)

The supply of high-skilled employees on the labour market is insufficient to cover the mere business cycle growth in the demand for these profiles. In order to enhance future economic growth, the demand for skilled labour will only grow. This confronts our society with an enormous challenge. Skilled labour shortages will force companies to adapt their growth strategies (see KBC Economic Opinion to be published on 7 September 2017). The current pace of growth of high-skilled labour is too low to cover the economic needs while the role of high-skilled people in advanced economies will continue to grow in the future. In particular, the fastest growing European economies are likely to be faced with this challenge soon, and their subsequent slowdown in growth will hurt the entire European economy.

In order to safeguard future growth in the European economy, more and faster investments in education and training are required. This is a complex mission with many dimensions. An important issue is a closer link between economic needs and education, for example because of the shortage of technological profiles on the labour market. Such investments will only have a significant impact in the longer run (in technical terms, the labour supply is inelastic in the short run). European countries are reacting very slowly to this challenge whereas emerging markets are catching up remarkably fast. A shortage of skilled labour will not only reduce the EU’s future growth potential, it will also weaken the EU’s global competitiveness and position in the world.

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