Labor Markets Briefs

Central and Eastern Europe has one of the tightest labor markets in the world

January 17, 2019

In recent years we have often discussed the evolving labor shortages in the US economy. When we look beyond the US, it is clear that there are areas where labor shortages are a much bigger issue. In this blog, we focus on Central and Eastern Europe (CEE), the region with perhaps the most severe shortage of labor in the world.

For this analysis, we have divided Europe into the following three regions. Central and Eastern Europe (CEE) consists of Bulgaria, Croatia, Czechia, Estonia, Hungary, Lithuania, Latvia, Poland, Romania, Slovenia, and Slovakia. Northern and Western Europe (NWE) consists of Austria, Belgium, Denmark, Finland, France, Germany, Ireland, the Netherlands, Norway, the UK, and Sweden. Southern Europe (South) consists of Greece, Italy, Portugal, and Spain. For the labor market indicators shown in this blog, the regions are weighted according to each country’s share in real GDP. Due to limited availability of data, some countries are excluded from the regional averages in some charts.

Labor shortages in CEE are of great importance for a couple of reasons. First, with 64 million people aged 15 to 64, CEE makes up 21 percent of the working-age population in the European Union. Second, after their accession to the European Union, CEE countries have become, with their lower labor costs, very integrated into Northern, Southern, and Western European value chains. Labor market tightness and rising labor costs will therefore have important spill-over effects to other European countries.

There are several indicators illustrating the severe tightness in CEE. At 4.3 percent, the CEE unemployment rate has reached the lowest point in its EU history (Chart 1). Compared to Northern and Western Europe (NWE), labor markets in CEE were hit harder by the Great Recession and the Euro Area crisis. After the Euro Area crisis, however, the labor market tightened faster in CEE and, by late 2016, the CEE unemployment rate dipped below the unemployment rate in NWE.

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Chart 1: The unemployment rates in Europe by region, seasonally adjusted, 2000 to 2018Q3.

Source: Eurostat, calculations by The Conference Board.

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In addition, the broadest measure of unemployment[1], also known as U6, is well below its pre-recession rate. Another measure of labor market tightness pointing at historically tight labor markets comes from the European Commission’s Business and Consumer Surveys. Its question on labor shortages shows that over 40 percent of businesses operating in the CEE manufacturing industry perceive labor as limiting their production (Chart 2). This is more than double compared to NWE. In the services sector, on the other hand, NWE and CEE experience comparable acceleration in labor market tightness (Chart 3). But consistently more NWE businesses report that labor is limiting their output of services. As with the unemployment rates, in Southern Europe (South) there still seems to be slack in the labor market.

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Chart 2: Percent of companies with labor limiting production in the manufacturing industry, 2000 to 2018Q3.