Productivity in Europe is slowing, putting a damper on real wage increases, the International Labour Organization (ILO) has found.
In its “World Employment and Social Outlook Trends 2025” chapter, the ILO highlights that labour productivity has declined since the COVID-19 pandemic.
Real labour productivity per hour worked in the EU-27 economies fell by 0.1% per year in 2021-23. The decline seems marginal, but it marks a complete reversal compared to the 1% annual increase in 2010-19 – excluding 2020 due to the disruption of trends by the COVID-19 pandemic. Similarly, real labor productivity per person grew by only 0.2% per year in 2021-23, compared to 0.8% per year in 2010-19.
Productivity slowdown
The differences in growth before and after the COVID-19 pandemic suggest that a significant slowdown in labour productivity is underway in the EU-27 economies.
At the same time, weekly hours worked per person employed are expected to increase by 0.3% per year in 2021-23, compared to a decline of 0.3% per year in 2010-19. Combined with the weaker economic outlook, these trends lead to lower expectations for real wage growth.
“Labour hoarding”
The ILO analysis states that the slowdown in productivity growth per worker may be due to the phenomenon of “labour hoarding”, a remnant of the pandemic period.
According to the definition of the European Central Bank, labour hoarding (as is the official translation of the term “labour hoarding”), concerns the share of employees in a company who are not fully utilized during the production process. The underutilization of the workforce can be expressed in different forms: reduced hours, rotational work or the employment of part of the employees in training programs, etc.
According to the ECB, a percentage of “stockpiling” of the workforce may be preferable for a company, compared to the costs required for staff restructuring: Costs of searching, evaluating and training new potential, compensation for layoffs, etc. Therefore, when a company is in a period of slowdown in production, it prefers to reduce the “input of labor”, in particular by reducing working hours (and therefore wages), instead of layoffs.
According to the ECB, this phenomenon is associated with the decrease in labor productivity in periods of economic recession, but also with the slower increase in periods of recovery.
Achilles heel of the economy
The ECB links “labor hoarding” to the relatively high degree of employment protection provided by the current institutional framework – e.g. rules on dismissals, compensation, etc. It is not difficult to read behind these lines the pressures for further deregulation of labor relations and even greater ease of mass layoffs.
The above “desire” is openly expressed in analyses by the European Stability Mechanism, which characterizes the “hoarding” of labor in periods of slowing growth as the “Achilles heel” of the Eurozone. It considers that the economies most affected by this phenomenon are Germany and France, and that if companies were to lay off “redundant” workers, employment would decrease by 7% and 5% respectively.
Layoffs coming
To return to the ILO analysis, it is somewhat puzzling that an organization that supposedly defends workers’ rights is adopting the rhetoric of bankers.
It even points to ECB data, which shows that in the first quarter of 2024, more than 19% of companies “stockpiled” labor – that is, did not lay off workers when they should have, compared to 12% before the pandemic began.
The accumulation of labor despite the worsening economic outlook reflects cyclical and structural factors, as companies absorb shocks, the ILO notes.
However, it also corresponds to weaker labor productivity growth.
Weak economic prospects in Northern, Southern and Western Europe are expected to translate into layoffs and a subsequent increase in unemployment, the ILO predicts.
ILO sees slowdown in wage growth
Labor productivity in Northern, Southern and Western Europe is growing much more slowly, by 0.5% per year in 2014-24, than in Eastern Europe, where it increased by 2.2% per year.
Several countries in Northern, Southern and Western Europe are also experiencing a decline in real wage growth, in contrast to the increases observed in many Eastern European countries.
Decreases were observed in the annual average growth of real wages between 2022 and 2024 in France, Italy, Ireland, Sweden and Switzerland, while increases were observed in most Eastern European countries over the same period.
Part of the challenge lies in the slowdown in structural transformation in Northern, Southern and Western Europe, which, combined with the weak economic outlook, bodes ill for labour productivity growth.
The slowdown may also reflect lagging investment in digital services, research and development and infrastructure – areas that would otherwise contribute to rapid growth in real productivity per hour worked.
