Investing in Productivity to Overcome the Tight Labor Market

14 April 2023 / Report

European Labor Market Outlook: H1 2023

Ensuring Europe has the labor force it needs to drive economic growth requires strategic cooperation between key stakeholders—but businesses can take practical steps to improve the supply and productivity of their workers.

Trusted Insights for What's Ahead™

Europe’s labor market is showing impressive resilience despite the slowing economy. For now, employers keep hiring while facing widespread labor shortages. Demand for workers is particularly strong in services and construction.

Participation in the labor force has rebounded spectacularly from the pandemic, leaving little room to find new workers.

Worked hours remain depressed as working patterns have changed since the pandemic. Hiring companies struggle to increase working hours to make up for labor shortages.

Labor shortages put a drag on economic output, meaning companies should turn their focus to productivity.

Businesses are adding workers rather than increasing productivity. From a labor perspective, Euro Area growth in 2021 and 2022 was driven by increased payrolls, while labor productivity declined—reversing the pandemic pattern, when worked hours declined far more than output.

Technological and environmental challenges require that companies prioritize productivity and digital/technical skills, after three decades more focused on cost cutting. The shift to less labor-intensive electric vehicles is an example of the need for companies to invest in and upgrade skills.

The labor market is expected to remain strong in 2023, particularly in services, but to eventually cool as the economy slows. Despite low consumer and business sentiment overall, consumers and companies have remained upbeat on work opportunities/hiring prospects. However, the labor market faces adverse financial conditions, including rising interest rates, which will slow down economic activity further and reduce labor demand.

Wages keep rising amid this tight labor market, though wage growth is well below inflation. Wage growth in Europe is not fueling an inflationary spiral and trails that of other economies like the US. The most indebted countries and weakened banks are starting to question the European Central Bank’s cooling strategy. Higher corporate margins for consumer goods seem to play a greater role in higher prices than the labor market does.

European Labor Market Outlook: H1 2023

Trusted Insights for What's Ahead™

Europe’s labor market is showing impressive resilience despite the slowing economy. For now, employers keep hiring while facing widespread labor shortages. Demand for workers is particularly strong in services and construction.
Participation in the labor force has rebounded spectacularly from the pandemic, leaving little room to find new workers.
Worked hours remain depressed as working patterns have changed since the pandemic. Hiring companies struggle to increase working hours to make up for labor shortages.
Labor shortages put a drag on economic output, meaning companies should turn their focus to productivity.
Businesses are adding workers rather than increasing productivity. From a labor perspective, Euro Area growth in 2021 and 2022 was driven by increased payrolls, while labor productivity declined—reversing the pandemic pattern, when worked hours declined far more than output.
Technological and environmental challenges require that companies prioritize productivity and digital/technical skills, after three decades more focused on cost cutting. The shift to less labor-intensive electric vehicles is an example of the need for companies to invest in and upgrade skills.
The labor market is expected to remain strong in 2023, particularly in services, but to eventually cool as the economy slows. Despite low consumer and business sentiment overall, consumers and companies have remained upbeat on work opportunities/hiring prospects. However, the labor market faces adverse financial conditions, including rising interest rates, which will slow down economic activity further and reduce labor demand.
Wages keep rising amid this tight labor market, though wage growth is well below inflation. Wage growth in Europe is not fueling an inflationary spiral and trails that of other economies like the US. The most indebted countries and weakened banks are starting to question the European Central Bank’s cooling strategy. Higher corporate margins for consumer goods seem to play a greater role in higher prices than the labor market does.