Blog Post

The ever-rising labour shortages in Europe

Historically high labour shortages in most central-eastern and north-western EU countries suggest that the immigration of central Europeans to north-west EU countries did not take away jobs from local workers on a significant scale. But as labour shortages now exceed their pre-crisis peak, several urgent measures must be considered to help to combat the problem.

By: , and Date: January 25, 2018 Topic: Macroeconomic policy

A frequently voiced concern by citizens of western and northern European countries is that immigration from the newer central and eastern EU member states has taken away the jobs of local workers. What do business surveys say about this hypothesis?

The business and consumer survey, which is conducted by the European Commission in all EU countries using the same methodology, asks about the role of labour as a factor limiting economic activity.

Figure 1 shows that in all three major sectors – industry, building and services – the share of companies reporting lack of labour as a reason for limiting business increased among north-west EU countries between the 2004 EU enlargement and the 2007 crisis. It has also increased in the central and eastern European member states, but not in southern European countries.

These findings have two implications: first, emigration from central and eastern European countries after EU enlargement had a negative impact on their home labour markets and created labour shortages. Second, the immigration of these central Europeans to north-west EU countries did not take jobs from local workers at any significant rate, because labour shortages in those countries were on the rise in parallel with the arrival of central and eastern European workers.

With the recession and increased unemployment after 2008, labour shortages became a minor problem, but have re-emerged with the recovery after 2012.

More recently, the severity of these shortages exceeded its pre-crisis peak, especially in central and eastern European countries, but also in north-west European countries.

Therefore, the conclusions reached for the pre-crisis period continue to apply. It is also noticeable that in the four southern European countries, labour shortages have not posed a major problem, either before the crisis or more recently.

Labour shortages could be overcome by immigration (either from other EU countries or from non-EU countries), increased supply of domestic workers and by robotisation.

Robotisation is at best a long-term prospect and not all tasks can be performed by robots, while there is often resistance to immigration from outside the EU. Emigration from central and eastern Europe to north-western EU countries increases labour shortages in the former and reduces them in the latter.

So how should labour shortages be addressed? In our recently published book of research on migration, we make the following recommendations for both north-west and central European countries:

  • Take steps to foster greater labour-force participation;
  • Undertake a careful examination of public-sector efficiency. The resulting reduction in public-sector employment would free up more workers for the private sector;
  • Prioritise the development of training programmes targeting the professions and skills suffering from the greatest shortages;
  • Increase the progressivity of personal income tax and social security contributions (by cutting rates applied to low earners and increasing the rates applied to high earners) to facilitate a net income increase for low earners in a budget-neutral way.

Figure 2 shows that there is scope for increasing progressivity in most EU countries. A lower total tax and social security burden on low-income earners would also facilitate a reduction in the black economy.

In central and eastern European countries, higher net wages throughout the wage distribution could slow emigration and speed up return migration.

For five of the six central and eastern European counties for which data is available, the tax wedge of low-wage earners is even higher than in the highly-indebted Greece and Spain (Figure 2).

Cutting labour taxes and social security contributions while increasing other taxes (in a fiscally-neutral way) might facilitate net wage increases without increasing the overall wage bill for companies and undermining fiscal sustainability.

Wealth and inheritance taxes are important candidates to counterbalance the labour tax reduction; such tax adjustments would also foster more inclusive growth, as argued by Darvas and Wolff (2016).

The labour shortage problem has become so severe that these remedial measures require urgent consideration.

 


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