The experts attending the meeting – representatives of international institutions and central banks, national policymakers, academics, and social partners – highlighted various bottlenecks that already existed in the European labour markets before the crisis. Labour market participation, for instance, was low in a large number of countries and structural unemployment in many cases already high. Also, a large gap had built up in employment protection between temporary and permanent employees in many countries, including northern ones. Furthermore, the wage setting process was problematic, especially in southern countries, as governments often very easily declared collective labour agreements applicable to all firms operating in a particular sector. The negotiating employers' and employees’ organisations were often not sufficiently representative, and third parties found it very difficult to opt out of wage agreements. This enabled wage and productivity growth to diverge widely. Wages also tended to respond insufficiently to economic shocks. Wages in the Spanish construction sector for instance continued to rise, even when construction companies were hit hard by the recession and resorted to mass layoffs.
Currently almost 20 million people in the euro area are out of work. In Spain and Greece more than 25% of the labour force is unemployed, as are more than 50% of all young workers. In order to improve the functioning of their labour markets, a large number of euro area member states have implemented important reforms since 2008. For instance, measures to increase labour participation have been taken, e.g. raising the (early) retirement age and increasing the incentives in the unemployment benefit system to search for a new job. Southern member states in particular have taken steps to close the gap in employment protection between permanent and temporary contracts, and to encourage businesses to create new jobs as soon as growth picks up. They have also drastically reformed the wage bargaining process in order to better align wages with the circumstances individual firms are facing.
The experts also looked ahead at the impact of the reforms. This impact is still difficult to identify as labour market reforms typically take time to bear fruit. In Portugal and Spain for instance, wages initially hardly responded to the persistent job losses. Meanwhile, wage growth has slowed down significantly. This is reflected in the chart below, which shows wage growth in Portugal in 2009 and 2012. While a large number of employees in 2009 still saw their nominal wages rise substantially, wage increases occurred far less frequently in 2012. The recent reform of the wage setting process likely played a significant role here. Wage moderation has enabled businesses to improve their competitiveness and prevent further job losses.