A well-functioning labour market is one of the pillars of Europe's competitiveness and prosperity, and underpins its social contract. When this breaks down, the costs of failed businesses, lost years, and dreams unrealised is immense, and a potent driver of voter dissatisfaction. The gravity of this social dimension cannot be overstated — Earth4All, an international economic research initiative, finds that with business as usual, social tipping points will be breached before environmental ones. This makes addressing labour market dysfunction all the more urgent. As Draghi and Letta both state in their reports: if Europe is to successfully navigate the ongoing digital and green transitions, it needs a labour market that works.
Despite businesses consistently identifying labour shortages as a pressing concern, the Commission's current legislative initiatives appear to have downgraded fixing the labour market. According to Eurobarometer, over two-thirds of European companies cite labour and skill shortages as one of their three most serious problems, while only one-third point to regulatory burdens. This mismatch between policy priorities and business needs is particularly concerning given that Europe’s working-age population expected to decline by 10% in the coming 25 years, suggesting these shortages will only intensify.
While the EU has consistently attempted to prioritise combating skills and labour shortages, this has not been properly resourced and has not delivered to date. In times of renewed enthusiasm for industrial policies, not properly matching the necessary skills with the Clean Industrial Plan could lead to a huge waste of public investments. Recent modelling by Project SEER¹, a European research consortium, shows that over one-third of jobs created through green industrial policies such as the Net-Zero Industry Act will likely remain vacant due to labour mismatches. However, this research also identifies effective policy interventions to bridge this gap.
When green industrial policies are complemented with labour policies, workforce shortages could be reduced, labour force participation rates increased, and unemployment rates decreased. The modelling results shows that combining labour policies, such as investing in reskilling and job matching services, could deliver superior outcomes. Furthermore, industrial policies are most effective when tailored to regional strengths. For instance, supporting green and digital industries in areas with underutilized technical workers can maximize job creation while advancing strategic industrial and economic development goals for a successful twin transition. Realising these benefits, however, requires strong coordination at the EU level to align regional initiatives and ensure efficient allocation of resources across member states, though this represents only the first step in a broader transformation.
While such targeted labour policies are essential to complement industrial strategies, a more comprehensive approach is needed.
These targeted labour policies need to be complemented by a broader set of coordinated interventions to strengthen labour market resilience and enhance Europe’s competitiveness. Drawing from our systems-change approach to the EU strategic agenda, we propose five key interventions that enhance the foundations of work and employment in line with the European Pillar of Social Rights. Additionally, these measures should be accompanied by specific strategies to develop, attract and retain global talent, especially in frontier technologies.
These five interventions build on existing EU initiatives and proven practices across member states. First, improve and expand education for all and throughout life to close the skill gap, by reducing barriers to participation, including social partners in the development of educational programmes, and reintegrating humanities and science as core competencies. Second, ensure accessible child care and more flexible working arrangements to increase the participation of parents, caregivers and senior citizens. Third, provide good working conditions and fair pay, and fourth, invest in liveable and affordable neighbourhoods close to employment sources to improve employee attraction, retention and reduce poverty. Finally, any just transition requires financial support for the periods in between employment.
To fully capitalise on these labour market reforms in an era dominated by artificial intelligence and robotics, Europe needs to unlock its creative and technological potential. Central to this effort is establishing the fifth freedom of research, innovation, data, and knowledge as recommended by the Letta report. This requires creating a European Knowledge Commons, investing in cutting-edge public and private research infrastructure, harmonizing digital standards, and fostering cross-border collaboration to maximise the talent and employment pool. These initiatives should be complemented by enhanced EU market development for AI, strengthening European and international partner networks, and attractive conditions for skilled professionals and entrepreneurs — including providing safe harbour for those seeking alternatives to the United States.
It is these three interventions — specific labour policies to complement industrial policies, foundational labour market reform, and the implementation of the fifth freedom — that would provide Europe’s workers and businesses with the policies they need. This is essential if the EU is serious about reducing waste, addressing voter’s direct concerns, and deliver on its promise of a competitive, sustainable, and socially inclusive economy. The time for evidence-based labour policy is now – Europe's prosperity depends on it.
Janez Potočnik and Sandrine Dixson-Declève are the co-founders of the Systems Transformation Hub and members of Project SEER’s advisory board, Milan Petit is Project SEER lead and member of the Systems Transformation Hub.
The content presented in this opinion piece is solely those of the author in their personal capacity, and does not necessarily reflect the position of the Systems Transformation Hub or its members.
1. The research was conducted for the Foundation of European Progressive Studies, the think tank of the progressive political family at EU level.