After peaking in 2022, labour shortages across the EU are back at their pre-pandemic levels and on a declining path. Vacancy rates have fallen markedly, and the broad-based tightness that characterised the post-pandemic labour market is fading. Yet, this easing of the labour market has not translated into higher unemployment. This combination – sharply lower vacancies but stable unemployment – is unusual and raises important questions on where the EU labour market is expected to go.

One shock after the other: The rise and fall of labour shortages in the post-pandemic period

The post-pandemic labour market boom was driven by a surge in labour market demand following the lifting of the COVID-19 containment measures. Labour market supply adjusted slowly, partly constrained by temporary disruptions to intra-EU mobility and third-country migration during the pandemic. This resulted in a rapid tightening of labour markets, characterised by a steep increase in labour shortages and widespread recruitment difficulties across almost all sectors (Turrini et al. 2022, Arpaia and Halasz 2023).

The energy crisis and consequent hike in inflationary pressures did not immediately cool labour demand but rather amplified it. Since wages tend to respond less rapidly than prices to inflationary shocks, real wages initially fell behind inflation in most EU member states (Figure 1). This decline in real wages supported companies’ profit margins in a context of relatively strong corporate balance sheets. Put together, falling real wages and buoyant profits sustained labour demand, and companies continued to report widespread labour shortages despite weakening activity (Verwey et al. 2023).

Figure 1 Labour shortages and real wage growth in the EU, 2013 Q1–2025 Q2

Notes: Labour shortages are included as the share of firms in industry, services, and construction, indicating that labour is a ‘factor limiting production’. Real wages are calculated based on the compensation per employee deflated using the GDP deflator.
Sources: The European Business and Consumer Survey of the European Commission’s Directorate General for Economic and Financial Affairs (labour shortages) and Eurostat – national accounts (real wages).

From 2023, the dynamics reversed. Real wage growth turned positive in most member states, supported by a softening of inflationary pressures, while productivity continued to stagnate. This relative increase in the cost of labour dampened labour demand (Figure 1). At the same time, labour supply expanded, supported by a strong increase in the net inflow of migrants, partly linked to the increased inflow of Ukrainian refugees (Acre et al. 2025, Kiss et al. 2026).

The joint effect of softer labour demand and stronger supply resulted in a steep decline in labour shortage indicators, almost synchronously across member states and sectors. This declining trend continued into 2025, supported by higher economic and geopolitical tensions and a more cautious investment environment.

Why has the unemployment rate not increased (yet)?

Under standard labour market dynamics, a steep drop in vacancies is expected to be accompanied by a rise in unemployment. However, the unemployment rate in the EU barely changed in the past three years.
The absence of a change in unemployment is particularly striking given that the labour market participation rate in the EU continued to increase in this period, which mechanically exerts upward pressure on the unemployment rate.

A possible explanation is linked to the exceptional situation that characterised the labour market at the outset of this episode. Vacancy rates started from historically high levels, while the unemployment rate was relatively low. The probability that a jobseeker finds a job with a given job search effort is expected to increase with the number of vacancies, but at a decreasing rate. Consequently, a drop in vacancies starting from a very high level may have a relatively minor impact on the chance to find a job and, therefore, also only a small effect on the unemployment rate.

Graphically, this means that the EU labour market finds itself on a ‘steep’ segment of the Beveridge curve, the downward-sloping relation empirically observed between vacancies and unemployment (Figure 2). However, if labour demand weakens further, the drop in vacancies could increasingly be accompanied by unemployment inching up, and the labour market could move along a path where the Beveridge curve is flatter.

Figure 2 Changes in the unemployment and labour shortages, EU27, 2005–2025 Q2

Source: Authors’ calculations based on Eurostat data and Business and Consumer Survey (Directorate General for Economic and Financial Affairs, European Commission).

Early warning signs?

So far, traditional leading indicators of unemployment – such as youth unemployment or short-term unemployment – remain stable. However, other indicators – such as the hiring rates for those very far from the labour market – show some signs of deterioration in line with a weakening in aggregate labour demand.

When labour demand weakens, firms typically adjust first by slowing hiring rather than increasing layoffs. As a result, when the labour market starts to slow, hiring rates tend to fall before separation rates rise. Evidence based on quarterly labour market transition rates (Figure 3) suggests a decline in the hiring rate. This decline is mainly driven by a decline in the transition rate from inactivity to employment (panel C), while a slowing trend in the transition rate from unemployment to employment (panel B) is more recent and less clear-cut.

This is in line with the notion that the jobseekers with the weakest attachment to the labour market are the first to be affected by a slowdown in labour demand. The separation rate (from employment to unemployment; panel A) remains at a record low level, possibly reflecting also structural changes in the workforce as older and more educated workers are less likely to lose their jobs.

Figure 3 Quarterly transition rates in the EU

Source: Eurostat.

What comes next?

In conclusion, labour shortages are on a declining path, without an indication that this decline is bottoming out. Yet, unemployment has not started to increase. So far, leading indicators on unemployment, such as youth unemployment or long-term unemployment, remain resilient. However, the declining hiring rate for those with weak labour market attachment (e.g. discouraged workers) may suggest that a turning point is within reach.

How the state of the labour market will evolve will depend on how new shocks will affect labour demand going forward. Should labour demand further weaken, shortages are likely to further drop but at a more moderate speed compared with past months, while unemployment could start inching up more dynamically.

References

Acre, O, A Consolo, A Dias da Silva, and M Weissler (2025), “Foreign workers: A lever for economic growth”, ECB Blog, 8 May.

Arpaia, A, and A Halasz (2023), “Short- and long-run determinants of labour shortages”, Quarterly Report on the Euro Area 22(1): 17–30.

Kiss, Á, A Turrini, and A Vandeplas (2025), “Slack vs. tightness in euro area labour markets: Growing mismatch after COVID-19?”, Acta Oeconomica 75(2): 209–30.

Kiss, A, J Maldonado, A Turrini, and K Van Herck (2026), “Migration, mobility and the EU labour market: Recent developments”, European Commission, European Economy Discussion Paper 241.

Turrini, A, A Vandeplas, and A Kiss (2022), “Tight euro area labour markets after Covid-19: The role of labour market mismatch”, VoxEU.org, 19 August.

Petrongolo, B, and C A Pissarides (2001), “Looking into the black box: A survey of the matching function”, Journal of Economic Literature 39(2): 390–431.

Verwey, M, A Kiss, C Tinti, and K Van Herck (2023), “A modest recovery ahead after a challenging year”, VoxEU.org, 22 November.