The evolution of Skills Mismatch in Europe

27/09/2024

By Prof. Georgios Panos, Aristotle University of Thessaloniki (Greece)

The first quarter of 2014 brought about the largest increase in skills mismatching across European labour markets. Using data from some 46 million European employees between 2006 and 2022 from the yearly EU Labour Force Survey[1], figure 1 documents this massive decline in skills matching[2] in European labour markets (Panos, et al. 2024).

How big was the decline?

At the peak of the Eurozone debt crisis between 2013 and 2014, all countries experienced large declines in skills matching ranging between -3.2% (Czech Republic) and -29.5% (Ireland). The absolute magnitude of the increase in skills mismatching was between 2.7 and 15.5 percentage points. The only exception was Iceland, which started experiencing large rises in mismatching gradually between 2010 and 2014, in the aftermath of the global financial crisis. An inspection of the quarterly data of the EU-LFS confirms that it was the first quarter of 2014 which brought about the biggest drops in skills matching in labour markets across Europe.

Why did it occur?

The notable increase in skills mismatching in 2014, as opposed to previous years, can be understood in the context of several economic, political, and structural factors that either fully materialized or became more evident around that specific year. While the groundwork for these mismatches was laid earlier, particularly in the aftermath of the global financial crisis and Eurozone debt crisis, the specific dynamics converged in 2014 for the following reasons:

• Delayed economic recovery and labour market lag after the Eurozone debt crisis: In 2013, Europe was still grappling with sluggish economic growth, high unemployment, and fiscal austerity measures, especially in Southern Europe. It wasn’t until 2014 that modest GDP growth returned to many parts of Europe, resulting in more job creation. The effects of economic recovery on the labour market typically lag behind GDP growth. The recovery in employment, and thus the recognition of mismatches between new jobs and available skills, became more apparent in 2014 as companies started hiring again. This delay is a normal pattern after recessions, as businesses wait for sustained recovery before making large-scale hiring decisions.
• Shift from crisis management to long-term restructuring: Throughout 2012 and 2013, many European countries were still heavily focused on austerity measures aimed at stabilizing public finances. These measures often came at the expense of investments in education, training, and active labor market policies, which are crucial for addressing skills mismatches. By 2014, the focus in many countries began to shift toward more structural reforms and longer-term economic planning, revealing deeper labour market issues that had been masked by crisis management. Moreover, many of the emergency policies implemented to stabilize labour markets during the crisis (such as short-term work schemes) were scaled back around 2013. As these temporary measures ended, more structural challenges, including skills mismatches, became visible.
• Impact of structural reforms becoming evident: Several Southern European countries undertook significant labour market reforms between 2012 and 2014 as part of bailout agreements or national economic recovery strategies. These reforms included measures to make labour markets more flexible, reduce protection for permanent workers, and encourage more part-time or temporary work. While these reforms helped reduce unemployment in some cases, they also contributed to a rise in precarious, low-skill jobs that did not match the qualifications of the available workforce. Many European countries also initiated education and vocational training reforms during this period to better align the education system with labour market needs. However, the impact of these reforms was not immediate, and by 2014, many workers, particularly young people, were still entering the labour market with qualifications that did not align with available jobs.
• Youth unemployment peaking and lingering “Lost-Generation” effects: Youth unemployment across Southern Europe peaked between 2012 and 2013, with countries like Spain and Greece experiencing youth unemployment rates above 50%. The long-term effects of this youth unemployment crisis became more visible in 2014, as young people who had been out of work for years struggled to find jobs that matched their qualifications. This created a notable mismatch, particularly for recent graduates and young people with outdated skills. Prolonged periods of unemployment lead to a loss of skills, particularly for younger workers. By 2014, many of the young people who had been unemployed since the early 2010s were finding it increasingly difficult to re-enter the labour market because their skills had become obsolete or mismatched with the new jobs being created.
• Migration and labour mobility patterns intensified: By 2014, the trend of skilled workers migrating from Southern and Eastern Europe to wealthier Northern and Western European countries had intensified. The aftermath of the debt crisis had led many workers, especially younger and highly educated people, to seek better opportunities abroad. This exacerbated skills mismatches in the countries they left behind, particularly in sectors like healthcare, engineering, and education, where skilled labour was needed. Skilled migrants who moved to other European countries, particularly during the crisis years, often struggled to find jobs that matched their qualifications. By 2014, many of these workers were still working in lower-skilled jobs, contributing to an overqualification problem in their host countries and a mismatch between skills and job opportunities.
• Rise of technological change and digital transformation: While technological advancements were ongoing throughout the early 2010s, the pace of digitalization and automation began to accelerate around 2014. This was due to both the increasing adoption of digital technologies across industries and the rising importance of ICT sectors within the European economy. By 2014, digital skills had become crucial for a growing number of jobs, and the gap between the demand for such skills and the available workforce became more apparent. Companies often delay large-scale technological changes during periods of economic uncertainty, such as during the debt crisis. Once the economy began stabilizing around 2013 and 2014, many firms started implementing new technologies that automated certain processes, leading to job displacement and creating a demand for new, higher-level digital skills.

Is there any recovery?

Around 2014, the European Union and national governments began shifting their focus more explicitly toward addressing the skills gap. The EU launched initiatives like the Youth Guarantee and the European Skills Agenda to help reduce youth unemployment and improve skills matching. These initiatives recognized the growing gap between the skills taught in education systems and those demanded by the labour market, and they aimed to provide training and reskilling opportunities to workers across Europe. By 2014, the EU’s focus on transitioning to a green and digital economy began to take shape.

It is clear from figure 1 that European labour markets have not yet recovered from the mismatching shock that occurred in 2014. The recovery has been modest and can be seen mostly in the new member states of Easter Europe, which were affected  the least in 2014. This pattern can not be seen in other datasets that only provide snapshots at different points in time post-2014 from smaller samples.

Conclusion:

2014 was a pivotal year for skills mismatching in Europe because it marked the intersection of several factors that had been building up since the global financial and Eurozone debt crises. Economic recovery started to gain traction in 2014, but it revealed deeper structural labour market issues that had been masked by the crisis. Technological advancements, the effects of prolonged youth unemployment, labour market reforms, and migration trends all became more pronounced, highlighting the mismatch between the skills that workers had and the skills that employers needed. Thus, while many of these trends began earlier, they culminated in a significant increase in skills mismatching in 2014 specifically, from which the European labour markets have yet to recover. The realization that Europe needed to upskill and reskill its workforce to meet the demands of the green transition and digitalization led to new policy initiatives. This acknowledgment of the mismatch in digital and green skills also contributed to the focus on the issue from 2014 onwards.

[1]     The EU-LFS covers several millions of individuals from 27 EU countries, and 4 non-EU countries, namely Iceland, Norway, Switzerland, and the United Kingdom.

[2]     The notion of skills matching used is the vertical definition, i.e., the highest educational qualification being similar to that of workers in a given country, year, and occupation category (3-digit ISCO code).

Authors

Prof. Georgios Panos, Aristotle University of Thessaloniki (Greece)

Georgios Panos (44 years old) is a Professor of Finance at Aristotle University of Thessaloniki and an Affiliate Professor of Finance at the Adam Smith Business School at the University of Glasgow, where he worked for the past 10 years. He has held previous positions at the Universities of Stirling and Essex. He holds a Ph.D. in Economics from the University of Aberdeen (2010), a MSc Economics from the University of Warwick (2004), and a Bachelor’s degree in Economics with honors from the University of Ioannina (2002). He worked as a consultant at the World Bank for a total of seven years, focusing on financial and private sector development, entrepreneurship, and poverty reduction. He has collaborated on financial literacy enhancement programs with the World Bank for developing countries. His research activities in financial management, financial education, and skills matching and development have led to the attainment of major research programs funded by the European Union, such as the PROFIT program (2016-2019: €1.6 million) and the TRAILS program (2024-2027: €3 million). He is an Associate Editor of the European Journal of Finance, as well as a member of the editorial boards of Small Business Economics: An Entrepreneurship Journal and Journal of General Management. In April 2020, he was recognized as one of the best 40 MBA professors under the age of 40 globally by the American organization Poets&Quants, which ranks global postgraduate business administration programs. His published and ongoing unpublished studies on personal finance, financial management, financial technology, financial literacy, skills matching and development, as well as financial and social exclusion, are critically impacting these top-priority policy, education, and practice agendas.