Action needed to tackle intensifying labour shortage

By Andreas Charalambous and Omiros Pissarides

Unemployment was traditionally considered a major macroeconomic challenge, with ramifications extending well beyond the economy into the sphere of politics and society at large. However, more than ten years after the financial crisis of 2013, conditions in the EU, including Cyprus, appear to have changed radically.

The EU average unemployment rate stands at around 6.5 per cent, the lowest point since 1988. At the same time, serious labour shortages are experienced, especially in low-skilled occupations, even during periods of sluggish growth.

A key factor behind the new trends is demographic ageing, which is associated with a reduction in the active labour force from domestic sources, as a consequence of improved living standards and complex social perceptions. Ageing affects all developed and, increasingly, developing economies, including China.

In the past, the labour shortage challenge was countered by migration from southern Europe and, at a later stage, from eastern countries to central and northern Europe. Recently, these sources are, in effect, drying up, since the countries of southern and eastern Europe are facing similar demographic issues themselves.

The problem is intensifying, mainly as a result of three factors: (a) escalating resistance to immigration and the employment of foreigners, in particular those originating from non-European countries with different cultures, as well as due to ineffective policies for dealing with social integration aspects of the large stream of refugees and asylum seekers, (b) social changes and evolving professional expectations, which have intensified since the pandemic, and drive people, especially younger adults, to pursue jobs with flexible employment conditions, such as working from home and adjustable working hours, and (c) limited labour mobility in favour of high-demand occupations.

Scientific studies indicate clearly that incentives targeting a higher number of births are not effective. What, then, can the appropriate policies be, to adapt to the new conditions?

First, the formation of a long-term strategy of selective attraction of immigrants, focusing on both high- and low-skilled occupations, in which shortages are observed.

With respect to the former, it is advisable to form an active policy of supporting sectors associated with cutting edge technologies and green transition, as also suggested in a report by the former governor of the ECB, Mario Draghi.

Regarding the latter, immigrant selection procedures should involve qualitative and quantitative targets and cover genuine labour force needs, with the formulation of appropriate assessment criteria in terms of skills and qualifications. In addition, supportive measures aimed at the social integration of immigrants are required.

Second, the EU should encourage the employment of its inactive workforce, through: (a) appropriate training and, to combat the problem at its roots, more effective professional guidance of students, (b) the removal of existing tax and other disincentives which, at the moment, are negatively impacting flexible forms of work, including part-time employment, working from home or abroad, flexible hours and so on, as well as (c) the embracing and implementation of advanced retirement systems, which would allow voluntary employment beyond the age of 65, in line with the higher life expectancy of our times.

Andreas Charalambous and Omiros Pissarides are economists