OECD Economic Outlook, Volume 2024 Issue 2

Resilience in uncertain times

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OECD Economic Outlook

4 December 2024

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2. Understanding Labour Shortages: The Structural Forces at Play

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Introduction

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The recovery from the COVID-19 pandemic exacerbated labour shortages, which had been increasing across OECD countries since the 2008 global financial crisis. The rebound in activity, coupled with weakened labour supply due to largely temporary pandemic-related effects, including the withdrawal of older workers from the labour market (Duval et al., 2022), significantly contributed to heightened labour market tightness. Currently, job vacancy rates are falling and unemployment rates are edging up in some OECD countries, suggesting the phase of significant cyclical labour market tightness is mostly over (see Chapter 1). Nevertheless, labour and skill shortages remain at very high levels, particularly in some key sectors such as health care and information and communication. New insights from the OECD’s Employer Survey of the Global Forum on Productivity (GFP) reveal the nature and underlying structural causes of persistent labour shortages and how they differ across firms of different age, productivity and working conditions.

Labour shortages are being amplified by structural and technological shifts, including population ageing, the rise of artificial intelligence (AI) and the green and digital transitions. On the demand side, these transitions, along with the increasing adoption of AI, are driving significant changes in skill requirements across sectors (Dorville, Filippucci and Marcolin, 2024; Draghi, 2024). On the supply side, while efforts to increase the participation of underrepresented groups (especially the elderly, migrants and women) to the labour force could help ease shortages, population ageing continues to slow the growth of the working‑age population. As the workforce ages and technological progress accelerates, skill mismatches worsen, partly due to faster skill obsolescence. This issue is compounded by a decline in human capital accumulation, reflected in falling educational performance. Additionally, poor job quality, including inadequate pay and unfavourable working conditions, makes jobs in some high-demand sectors less attractive to workers. This challenge is particularly pronounced in sectors such as accommodation and food services, transportation and storage, construction and health and social care (OECD, 2018a; Causa et al., 2022, 2024a).

Different aspects of the labour shortages can be portrayed in a stylised framework where labour demand and supply interact to shape wages and job quality, and lead to labour shortages when there are labour search frictions and associated mismatches (Figure 2.1). The framework is intended to support the interpretation of the findings presented in this chapter and abstracts from the many feedback effects between different aspects. For example, labour shortages can affect the pace of structural developments as the adoption of certain technologies requires specific competencies. Similarly, shortages can enhance workers’ bargaining power, driving up wages, especially in markets characterised by firms’ monopsony power (Naidu and Dube, 2024).

Although cyclical labour shortages may have faded, structural labour shortages remain high, calling for decisive policy action to better align labour supply with demand and improve the matching of the two. Significant public and private investments in upskilling, reskilling and reforms to education and lifelong learning systems are essential to equip the labour force with the skills needed. Policies need to make sure students and workers acquire the necessary technical and soft skills to adapt to future challenges. Multiple labour market policies can be mobilised to enhance mobility and improve the efficiency of matching. Strengthening synergies with demand-side policies is crucial to ensure that workers with the appropriate skills are available to support technology adoption and advance the digital and green transitions. Labour force participation, particularly among older workers, women and youth, can be further increased through measures such as promoting healthy ageing, improving working conditions, introducing gender-friendly initiatives like affordable childcare, and enhancing school-to-work transitions. Improving job quality remains vital to attract workers to certain occupations. Migration, supported by robust integration policies, can also play a role in easing labour shortages.

Figure ‎2.1. Stylised conceptual framework
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Against this background, this chapter builds on the new GFP Employer Survey findings, complemented by administrative data, to explore the intensity and nature of labour and skill shortages across OECD countries, and outlines policies that can help to alleviate shortages. It is organised as follows. The next section documents recent developments in labour market tightness using macroeconomic and sectoral data. The third section presents the firm-level evidence from the survey on the structural dimension of labour shortages and their link to digitalisation, including AI penetration and the green transition. It also shows that labour shortages vary with firms’ age, productivity and working conditions. The last section points to the need for transformative policy action to address labour shortages.

In most OECD countries, labour markets are cooling after severe tightness during the post-pandemic recovery

Copy link to In most OECD countries, labour markets are cooling after severe tightness during the post-pandemic recovery

A common indicator of labour shortages is the ratio of the number of job vacancies to the number of unemployed individuals. Tightness1 spiked during the recovery from the COVID-19 pandemic, reflecting largely temporary factors such as massive and unprecedented policy support to workers and businesses, labour hoarding by firms, pandemic-related withdrawals from the labour market, reductions in working hours, changes in worker preferences and mismatches generated by shifts in the demand structure, notably between goods and services (Causa et al., 2022, 2024a; Duval et al., 2022; Doornik et al., 2023). By late 2023, vacancies per unemployed had returned to their pre-pandemic trend in the United States, the euro area and Japan, suggesting that much of the cyclical variation in labour shortages may have subsided (Figure 2.2).2

Figure ‎2.2. Cyclical pressures in labour shortages have eased
Copy link to Figure ‎2.2. Cyclical pressures in labour shortages have eased

The Beveridge curve is a graphical representation of the relationship between unemployment rates and vacancy rates in an economy over multiple points of time. It confirms the largely structural nature of current labour shortages. The outward shifts in the Beveridge curve in the United States and the euro area after the 2008 global financial crisis imply less efficient matching in the labour market (Figure 2.3).3 In the United States, the shift has been linked to increasing skill mismatches, reduced intensify of recruitment efforts by employers seeking workers and a rise in the share of long-term unemployed experiencing greater difficulties in exiting unemployment (Barlevy et al., 2024). In the euro area, both skill mismatches and an increase in the geographical dispersion of unemployment, contributed to the shift (Consolo and Dias da Silva, 2019). In Japan, a similar shift occurred in the aftermath of the early 1990s asset bubble with occupational mismatches playing an important role (Shibata, 2013). Although the Beveridge curve shifted in the United States and the euro area during the pandemic and early recovery period, current vacancy and unemployment rates are in line with the pre-pandemic norm. Further analysis underscores the significant role of structural factors in explaining variations in labour market tightness at the country-sector level in the last decade (Box 2.1).

Figure ‎2.3. Beveridge curves shifted outwards after the Global Financial Crisis
Copy link to Figure ‎2.3. Beveridge curves shifted outwards after the Global Financial Crisis

Box ‎2.1. Structural vs cyclical labour market tightness

Copy link to Box ‎2.1. Structural vs cyclical labour market tightness

Dorville, Filippucci and Marcolin (2024) analyse changes in sectoral patterns of labour market tightness across 28 OECD countries over 2010-2019 to see whether there is a causal link between rising tightness and the progressive unfolding of ageing, digitalisation, decarbonisation, globalisation and AI penetration. These structural factors are jointly analysed and tested against other possible determinants of the increase in tightness, such as a proxy for the economic cycle (the output gap), the changing skill composition of the workforce, plus country and granular sectoral indicators. Findings show that greater efforts to digitalise and decarbonise the economy already result in higher labour market tightness, while ageing adds to these pressures only in the medium term. Jointly considering all mentioned structural factors explains a large part of the country-sector change in labour market tightness, net of common shocks across countries (Figure 2.4).

Figure 2.4. Structural factors explain a large share of the variation in labour market tightness in the last decade
Copy link to Figure 2.4. Structural factors explain a large share of the variation in labour market tightness in the last decade

The growth in vacancies (labour demand) was the main driver of the increase in OECD labour market tightness from 2010 to 2022, although a declining trend in the unemployment rate also contributed, with some mitigating effects from increasing labour force participation (labour supply). Labour demand has been strong since the recovery from the 2008 global financial crisis and the post-COVID recovery was marked by an exceptional surge in vacancies. However, by 2022, vacancies had returned to levels close to those seen in the pre-pandemic years (Figure 2.5). Labour force participation, which was initially disrupted by the COVID pandemic, has since recovered to pre-pandemic levels in most OECD countries, exceeding 2010 levels (Figure 2.6). Although ageing has slowed labour supply growth, participation rates among older workers have reached record highs in many OECD countries. Additionally, migratory flows have bolstered labour supply in some countries, helping to mitigate the impact of demographic trends.

Figure ‎2.5. Increase in vacancies has driven labour market tightness in OECD countries
Copy link to Figure ‎2.5. Increase in vacancies has driven labour market tightness in OECD countries

Increase in labour market tightness, vacancies and unemployed

Figure ‎2.6. Labour participation is well above 2010 levels
Copy link to Figure ‎2.6. Labour participation is well above 2010 levels

Change in labour participation rate

The role of demand side factors is reflected in estimates of the sectoral patterns of changes in tightness. In high skill sectors like finance, ICT and professional services, tightness has increased more than in sectors requiring lower skills (Figure 2.7).4 Similarly, cross-country evidence on skill shortages at the occupational level shows that shortages are more important in high-skill occupations (OECD, 2022). This is partly because jobs in skill-intensive sectors require greater human capital, which takes time and effort to develop, and is often sector-specific. In contrast, the rise in labour shortages in low-skill sectors after the pandemic reflects the catch-up in labour demand after the shock and constrained output growth (OECD, 2023a; 2024a). This surge was mostly over in 2023, although labour shortages remain in some sectors where working conditions are poor and pay is low.

Figure ‎2.7. Shortages are more intense in high-wage sectors, particularly for skilled workers
Copy link to Figure ‎2.7. Shortages are more intense in high-wage sectors, particularly for skilled workers

Growth in labour market tightness across high- versus low-skill intensive sectors

Over the period from 2010 to 2022, changes in labour market tightness and in real labour compensation are positively and significantly correlated across OECD countries and economic sectors, but in most sectors growth in real compensation per worker has not kept up with increases in tightness (Figure 2.8). Despite acute labour shortages in the early phase of the recovery from the pandemic, real wage increases have remained relatively subdued, except in a few smaller economies (Figure 2.9). Several factors may explain the muted wage response to labour shortages, beyond the impact of slow nominal wage adjustments to inflation. Some firms likely viewed the heightened demand for their products or services as temporary. Given the difficulty of reversing wage increases if economic conditions deteriorate, firms tend to hesitate to raise wages in times of uncertainty. Hiring workers at high wages due to current scarcity can also create tensions within the company’s wage structure. Lastly, some firms may still exert monopsony power. For example, 16% of business-sector workers in 15 OECD countries are in labour markets that are at least moderately concentrated (Araki et al., 2022; US Bureau of Labor Statistics, 2024). Nevertheless, acute labour market tightness has likely weakened firms’ monopsony power (Naidu and Dube, 2024). Contrary to past experience, low-skill wages increased faster than the average following the pandemic, reflecting pay rises in low-skill sectors experiencing more acute labour shortages and statutory minimum wages increases (Autor, Dube and McGrew, 2023; OECD, 2023).

Figure ‎2.8. In the last decade, real wages have been associated with labour market tightness
Copy link to Figure ‎2.8. In the last decade, real wages have been associated with labour market tightness

Annualised growth in labour market tightness and real labour compensation per employee, 2010-2022

Figure ‎2.9. Real wage growth has remained subdued in many countries
Copy link to Figure ‎2.9. Real wage growth has remained subdued in many countries

Change from Q4 2019 to Q2 2024 or latest available

Firm-level evidence: insights from a new Employer Survey

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The OECD collected new firm-level labour shortage data in 2024 (Box 2.2), covering 34 OECD countries, Brazil and South Africa in a comparable and representative way. These data provide timely and detailed insights into the areas of the economy facing bottlenecks, enabling policymakers to design targeted interventions. They capture simultaneously the demand pressures that firms are creating on the labour market, the skill composition of their demand and whether the labour market provides the workers with the profiles that meet firms’ needs. Contrary to administrative data on unfilled vacancies and unemployment, information about firms’ labour shortages sheds light on recruitment difficulties even when job postings are not explicitly opened, or when a vacant position is eventually filled but with a sub-optimal job candidate.5

The Survey reveals that shortages are widespread and severe across countries (Figure 2.10). Firms were asked whether they face recruitment difficulties and, if so, whether these are particularly severe (defined as most or all vacancies being hard to fill). Between 70% and 85% of firms report difficulties in recruiting suitable personnel, with challenges being especially widespread in Costa Rica and Israel. Moreover, 15% to 35% of firms report severe shortages, with at least one-third of firms in Austria, Germany, Norway and Slovenia facing these acute challenges.

Box ‎2.2. The Global Forum on Productivity’s Employer Survey on labour shortages

Copy link to Box ‎2.2. The Global Forum on Productivity’s Employer Survey on labour shortages

The Employer Survey on labour shortages and mismatches designed by the Global Forum on Productivity collects information on those phenomena at the company level, with the aim to assess their prevalence across sectors and countries. The Survey collects data in a timely manner at the company level. It also requested information on (i) the firm-level consequences of experiencing recruitment difficulties, both on firms’ performance and internal organisation; (ii) the strategies that firms deploy to cope with such difficulties, and (iii) exposure of individual companies to structural changes, among others. The collection of data at the company level ensures that effects of structural changes, labour market imbalances and firm performance can be linked at the micro-level.

The Survey covers firms with 10 or more employees in all sectors of the economy except agriculture, utilities, financial services, public administration, education, household production and activities of extra-territorial entities, in 34 OECD countries plus Brazil and South Africa. A limited sample size prevented the inclusion of data for Estonia, Iceland, Latvia and Luxembourg. The Survey was administered in March – August 2024 as an online survey of about 500-1000 entities per country, sampled according to strata that account for the sectoral affiliation of the company and its size category. Targeted respondents were human resource employees, managers or executive managers, who received the questionnaire in the language of their country of residence. Questions mostly referred to 2023, with some questions referring to 2022-2023. The cross-country mean and dispersion of shortages are comparable to those recorded by the two existing international data collection exercises on the topic, i.e. Eurobarometer 529 (covering SMEs for European countries) and the Manpower Employment Outlook Survey 2024 (covering 41 countries worldwide but with differing degrees of representativeness by country). The GFP Employer Survey complements another OECD measurement effort that focuses on on-the-job skill mismatch (Marcolin and Quintini, 2023; OECD, 2024b).

Figure ‎2.10. Firms report severe difficulties finding personnel
Copy link to Figure ‎2.10. Firms report severe difficulties finding personnel

Firms reporting difficulties recruiting, 2022-2023

Although the sectors experiencing the most severe shortages vary across countries, healthcare, ICT, industry and professional and administrative services are often among the hardest hit (Figure 2.11). In some countries, such as Germany, severe labour shortages are reported across all sectors, whereas in others, like the United States, they are concentrated in specific areas, such as industry and ICT. These variations reflect differences in sectoral reliance on technologies and their demand for specific skills and occupations. For instance, the ICT service sector, an early adopter of AI (Calvino and Fontanelli, 2023), reports persistent shortages of software professionals (OECD, 2024c). In healthcare, long-term structural shortages stem from population ageing, which drives a surge in demand, as well as from poor working conditions, which constrain supply. Other sectors, such as accommodation and food services or construction face shortages due to strenuous working conditions or low wages.

Figure 2.11. Severe labour market shortages are uneven across sectors
Copy link to Figure 2.11. Severe labour market shortages are uneven across sectors

Firms reporting severe difficulties recruiting, 2022-2023

Structural factors change skill needs and create labour shortages

Data from the GFP Employer Survey suggest that shortages are more frequent for firms in high-wage sectors (Figure 2.12) and even more so when firms are seeking to fill positions that require tertiary education.6 High shortages in high-wage firms likely reflect the sorting of high-skill workers into these firms. Education has historically warranted a salary premium and the share of high-skilled workers in high-wage firms is greater than in firms at the bottom of the firm wage distribution. This is likely either because high-skilled workers increasingly cluster in the same firms as they get more specialised, or because better performing firms pay higher wages to attract better workers (OECD, 2021a).

In most countries at least 40% of firms experiencing labour shortages reported changes in skill needs, a significantly higher proportion than firms without shortages (Figure 2.13). This difference is particularly pronounced in Denmark, Hungary and Sweden. Changes in the products or services sold, inputs used, or new investments in tangible or intangible assets can alter the nature of tasks workers perform (Autor, 2013). These shifts, in turn, drive changes in the knowledge and skills that firms require from their workforce.

Among the firms opening vacancies due to changing skill needs, skills in shortage are predominantly tied to structural trends (Figure 2.14). Digital and green skills are the most in demand, followed by social and communication skills, which are often complementary to digital skills (Grundke et al., 2018). Firms in Brazil, Türkiye and South Africa report particularly frequent difficulties finding both green and digital skills. Green skills are also in significant shortage in the United States and Italy, while Swiss firms report substantial shortages of digital skills.

Figure ‎2.12. Shortages are more intense in high-wage sectors, particularly for skilled workers
Copy link to Figure ‎2.12. Shortages are more intense in high-wage sectors, particularly for skilled workers

Difference in the conditional probability of reporting a shortage between firms in high and low-wage sectors, by educational attainment of sought personnel

Figure ‎2.13. Labour shortages are associated with changing skill needs
Copy link to Figure ‎2.13. Labour shortages are associated with changing skill needs

Firms with and without labour shortages that report opening vacancies due to changing skill needs

Figure ‎2.14. Firms with changing skills are especially looking for skills related to structural trends
Copy link to Figure ‎2.14. Firms with changing skills are especially looking for skills related to structural trends

Firms opening vacancies due to changing skill needs, by specific skills needed

The green transition increasingly requires a specific subset of skills and will bring reallocation. Although the impact of the green transition on the total number of jobs is expected to be modest, sizeable labour reallocation from polluting to green sectors will be necessary (Causa et al., 2024b; OECD, 2024a). Workers with higher levels of education are more likely to hold green jobs than those with middle or lower levels of education. The latter face greater risk of displacement in the green transition, as they are over-represented in brown jobs (Causa, Nguyen and Soldani, 2024a,b). Tertiary educated workers in high-emission sectors can transition relatively easily to green-driven jobs due to similar skill requirements, but low- and medium-skilled workers face significant skill gaps, requiring more retraining (OECD, 2024a). Shortages may also emerge because of lower wages and job security in low-skilled green jobs, as science, technology, engineering and mathematics (STEM) graduates opt to work in higher-paying sectors instead, and because of geographic mismatches between declining and expanding industries (Box 2.3).

Box ‎2.3. The transition to net zero emissions is adding pressure on the labour market

Copy link to Box ‎2.3. The transition to net zero emissions is adding pressure on the labour market

Meeting the targets set to achieve net-zero emissions by 2050 is likely to contribute to increasing pressure on the labour market. While there is broad agreement that the net effect of the climate targets on the total number of jobs will be modest, the OECD Employment Outlook 2024 (OECD, 2024a) shows that major shifts are expected within and between certain sectors and regions as some jobs disappear, new opportunities emerge and many existing occupations are transformed.

Workers in shrinking high-emission sectors are likely to find new employment in green jobs as well as jobs that do not directly contribute to emission reductions but are in demand because they provide goods and services required by green activities (“green-driven” jobs). OECD (2024a) shows that the skill requirements of green-driven and greenhouse gas-intensive occupations with high education are indeed very similar. However, this is not the case for low- and medium-skilled workers, for whom the skills gap is larger and who therefore require significantly more retraining to move into green-driven jobs. In addition, the transition to net zero will increase the overall demand for skilled workers in the labour market, in particular in STEM.

However, skills are not the only bottleneck. Labour shortages in expanding green sectors may also be related to the lower attractiveness of some green-driven jobs compared to other jobs. OECD (2024a) shows that low-skilled green jobs, such as waste disposal and recycling, tend to have significantly lower wages and labour market security than other low-skilled jobs. This suggests that low-skill green-driven occupations may be a relatively unattractive option for low-skilled workers, even if they require little or no training. Moreover, while middle- and high-skill green-driven occupations come with a wage premium, STEM graduates may find more attractive to work in other sectors (e.g. finance or tech) that pay higher wages (Popp et al., 2022).

Finally, while both green-driven and emission-intensive occupations tend to be geographically concentrated, they are not necessarily in the same regions. The geographical mismatch between declining and expanding sectors is a third bottleneck to consider.

Over the past two decades, the digital transition has transformed labour markets and skill requirements.7 While digitalisation automates some jobs, it creates others in the ICT sector, but also in other industries, through productivity and competitiveness gains, lowering prices and facilitating the creation of new products.

The diffusion of AI may further affect labour and skill demand in different ways. AI may alleviate labour shortages in some sectors and worsen them in others (Dorville, Filippucci and Marcolin, 2024). On one hand, AI may automate a wide range of existing tasks, including cognitive ones, expanding beyond the automation of primarily blue-collar jobs seen so far. As a general-purpose technology, AI is expected to diffuse across many industries, with knowledge-intensive services such as finance, advertising, consulting and ICT likely to be most affected. On the other hand, in many industries AI is expected to complement rather than replace human labour, at least in the medium term, as it will create new tasks and potentially generate new jobs. AI-driven productivity gains could also increase income levels, supporting aggregate demand and, in turn, driving labour demand and heightening shortages in labour-intensive sectors, similar to the effects of digitalisation (Filippucci et al., 2024).

New evidence from the GFP Employer Survey shows that firms that experience changes in their production technology are more likely to face difficulties recruiting (Figure 2.15). In Switzerland, Denmark and Norway, for example, the probability of reporting a shortage when investing in AI, robotics or digital technologies is 40 to 50 percentage points higher than for a firm that does not invest in technology.8 Econometric analysis further supports the conclusion that the probability of facing a shortage increases with the change in firms’ technology regardless of the sector or country, even when other firm characteristics typically associated to recruitment behaviours (size, age, changes in sales) are accounted for (Filippucci, Laengle and Marcolin, forthcoming).

Furthermore, ageing will reduce labour supply growth over the coming decades in most OECD countries. The working-age population is projected to account for a lower share of the total population in 2050 than in 2020 in all OECD countries, except Israel and Mexico (André, Gal and Schief, 2024), with a decline of up to 15% to 20% of the 2021 level in some countries. Moreover, the working-age population is set to shrink in absolute terms in more than half of OECD countries, as well as in some emerging countries, like China. Ageing may also worsen labour shortages through skills obsolescence. Industries exposed to rapid technological change, like ICT, may experience more difficulties in recruiting skilled workers than less tech-intensive sectors, like education, as the working population gets older. Arpaia and Halasz (2023) offer evidence that EU-wide shortages increased alongside the old-age dependency ratio between 2000 and 2022. Relatedly, Dorville, Filippucci and Marcolin (2024) show that labour market tightness is higher in sectors that are most exposed to ageing and the green and digital transitions, and that tightness has increased more in more exposed sectors over 2010-2019.

Migration could help alleviate labour shortages in some sectors, provided effective integration policies are in place. Foreign-born workers have been the main contributors to labour force growth over the past decade in many countries. Migrants are overrepresented in accommodation and food services and construction, and in some countries also in health care (Causa et al., 2024a). However, addressing labour shortages through migration alone has limitations. Some countries lost workers through emigration, including high-skill professionals. Moreover, very large inflows would be needed to offset the impact of ageing in most countries. The net migration rates required to stabilise the old-age dependency ratio across the OECD would be around 2% of the population per year until 2050, compared to an average of around 0.3% per year over the 2000-2020 period (André, Gal and Schief, 2024).

Figure ‎2.15. Firms that are more exposed to the green and digital transitions report more shortages
Copy link to Figure ‎2.15. Firms that are more exposed to the green and digital transitions report more shortages

Difference in the probability of facing a shortage between firms experiencing a technological change and firms that experience no technological change

Labour shortages vary with firm characteristics

Labour shortages are also shaped by firms’ characteristics. As discussed above, firms in sectors undergoing rapid technological transformations often face acute skill shortages, driven by their investments in technology and the mismatch between the available workforce and new skill requirements. Firm demographics, such as size and age, also matter for firms’ hiring patterns, skill requirements and labour demand. For example, small firms face greater challenges in attracting talent compared to larger firms with stronger employer branding and resources (European Commission, 2023). These differences can help policymakers better identify the underlying causes of labour shortages and develop solutions to better align workforce with the needs of businesses and the broader economy.

Young firms tend to experience higher shortages, regardless of their sector and country (Figure 2.16). This is likely due to their more limited brand recognition, networks and benefits packages than more established companies can offer, making it harder for them to compete in the labour market, especially for experienced workers. Filippucci, Laengle and Marcolin (forthcoming) show that young firms are more likely than older firms to adopt a new digital technology, which may further exacerbate their recruitment difficulties. Lastly, young firms typically have limited financial resources to invest in training programs and learning opportunities, making it difficult for them to develop employees’ skills in-house. This reliance on hiring already skilled workers can intensify recruitment difficulties. As a result, labour shortages may further act as a barrier to scaling up and discourage further entry of new firms into the market.

Figure ‎2.16. Labour shortages are more acute for young firms
Copy link to Figure ‎2.16. Labour shortages are more acute for young firms

Firms with shortages, by firm’s age category. Predicted probability and 95% confidence interval

The relationship between labour shortages and productivity (measured as turnover per worker) is negative (Figure 2.17). Less productive firms do not typically offer competitive wages, invest in employee training or provide sound working conditions, making them less attractive to potential hires. Their potentially weaker management practices can also translate in less efficient recruitment strategies, contributing to hiring difficulties. Indeed, low-productivity firms are more likely to experience shortages due to low wages and poor working conditions (Figure 2.18). Moreover, they are more likely to report that shortages lead to production losses, such as reduced innovation.

Figure 2.17. Labour shortages disproportionately impact low-productivity firms
Copy link to Figure 2.17. Labour shortages disproportionately impact low-productivity firms

Share of firms reporting shortages, by labour productivity. Predicted probability and 90% confidence interval

Figure 2.18. The reasons and consequences of shortages differ for high- and low-productivity firms
Copy link to Figure 2.18. The reasons and consequences of shortages differ for high- and low-productivity firms

Percentage increase in the average probability of reporting a certain feature when in shortage, given one standard deviation higher productivity

In contrast, high productivity firms are more likely to report shortages due to a lack of workers with appropriate skills (Figure 2.18). Controlling for the sector and country of production, a one standard deviation rise in labour productivity raises the probability of lacking workers with appropriate skills by 7% relative to the average firm in the sample. High productivity firms are also more likely to respond to shortages by investing in automation, training and internal reorganisation (“better management practices”) which can help reduce the labour shortages they face in the medium run. As low productivity firms suffer larger costs of shortages, the productivity gap between low- and high-productivity firms may widen, further contributing to the persistence of labour shortages over time.

More broadly, shortages can arise due to the poor working conditions that characterise jobs in some firms and sectors. A significant share of firms across OECD countries report experiencing shortages because they offer poor working conditions (Figure 2.19). On average across countries, approximately 40% of firms in transportation report a shortage because of the long or unsociable hours that the work imposes and the share is even higher when considering severe shortages. Unfavourable geographical conditions are an important reason for shortages for 37% of firms in mining, but only in 17% of firms in arts and entertainment. Accommodation, and also health care, suffer from shortages because the job does not attract interest from potential candidates. This can be related to physical and mental health risks that are not compensated by adequate economic treatment. In these low-quality jobs, women and migrants are typically overrepresented (Box 2.4).

Figure 2.19. Poor working conditions generate shortages, especially in certain sectors
Copy link to Figure 2.19. Poor working conditions generate shortages, especially in certain sectors

Firms with shortage due to unfavourable conditions, by sector

Box ‎2.4. Labour shortages and labour market inequalities

Copy link to Box ‎2.4. Labour shortages and labour market inequalities

Recent OECD work (Causa et al., 2024a) complements the analysis presented in this chapter by focusing on high-demand sectors where job quality is poorer (agriculture, accommodation, construction, health and social care, transportation and storage).

From a distributional perspective, women represent the bulk of healthcare workers and accommodation and food workers across virtually all countries considered. Migrants, too, are overrepresented in accommodation and food in the vast majority of countries and in the construction sector, while older workers are systematically overrepresented in agriculture.

Wage evolutions in these high-demand sectors are conversely much more heterogeneous across countries. If wages in accommodation and food have evolved favourably across many OECD countries since end-2019, both in absolute terms and relative to wages in low-pay industries, little to no gains in real wages took place for workers in construction and in transportation and storage across most countries between 2019-2023. Real wages in health and social work activities have declined in a number of OECD economies (e.g., Italy, Greece, Sweden), but increased as much or more than in high-pay industries in others (e.g., Hungary, Poland).

Turning to the non-pay components of job quality for high-demand jobs, the analysis finds that:

Across all countries, healthcare, accommodation and food, and transportation and storage tend to exhibit higher incidence of shift work. Women represent the bulk of shift workers in nursing and personal healthcare and among waiters, food preparation assistants and cleaners.
Difficult work environments and working schedules can translate into mental and physical health risks, reducing workers’ productivity, wellbeing and attachment to the job. These risks are pervasive in the EU workforce: half of the employed individuals in the EU is exposed to mental health risks, albeit with marked differences across countries (34% to 77%).
Workers in the health sector are most likely to face mental health risks, with reported exposure reaching 60% of employment in the vast majority of EU countries. 34% of nurses and midwifery professionals report a work overload, well above the economy-wide average of 22%.
Beyond the healthcare sector, workers in other contact-intensive activities facing labour shortages also report high exposure to mental health risks, due to e.g. difficult interactions with customers among waiters and bartenders and pressure or work overload among road drivers.
Job insecurity is another frequent reason to report exposure to mental health risks. Occupations that have been recently in high demand also display high incidence of temporary contracts.
ILO accidents data reveal that “better known” physical health risks are generally higher in high-demand jobs, too. Healthcare workers face double the risk of a non-fatal accident than other workers, on average across OECD countries. Transportation, storage and construction workers are overwhelmingly more likely to experience work accidents, especially fatal ones. And if a construction worker is approximately five times more likely to experience a fatal accident than in the total economy, an agricultural worker is nine times more likely, although data limitations preclude a more rigorous analysis of this sector.

Transformative policy action is needed to address labour shortages

Copy link to Transformative policy action is needed to address labour shortages

This section discusses policy approaches aimed at influencing labour and skill supply, focusing on strategies to enhance the availability of qualified workers in the economy. It examines measures that support individuals in acquiring the skills needed to meet market demands. Furthermore, the section highlights policies aimed at improving the efficiency of matching workers with firms, thereby fostering a more adaptable and resilient workforce.

Tackling shortages in the labour market will require transformative policy actions that enable a prompt adjustment of the labour market to the business cycle while ensuring that the challenges of ageing, the green and digital transitions and AI diffusion are met. While the impact of policy actions shaping labour supply may take some time to bear fruit, other actions can affect the composition of the current labour force and its allocation across firms, allowing for greater responsiveness in the labour market in the shorter term.

Table 2.1 summarises the different policies that are discussed hereafter, dividing them between policies that mostly affect labour supply, labour demand or the matching of the two. The table also distinguishes between policies that can be leveraged to adapt the labour market as soon as possible to the new reality of pervasive labour shortages and policies that can anticipate future needs in the labour market and can minimise future shortages. Throughout the section, persistent shortages are understood as a limitation to growth and the productive allocation of labour in the economy. This does not exclude that tight labour markets can be a source of temporary bargaining power for workers and can contribute to reducing inequality, improving job quality and stimulate the participation of groups with lower labour market attachment, especially in monopsonistic markets (Naidu and Dube, 2024; OECD, 2024a).

	Policies to ADAPT	Policies to ANTICIPATE
Labour supply	Participation of the elderly: tax incentives to stay in work; reskilling efforts; age-friendly working conditions; anti-discrimination policies Participation of women: parental leave and post-leave reskilling; anti-discrimination policies; household taxation design Participation of migrants: integration policies; foreign women childcare Design of tax and benefit systems for the unemployed Wage policies for public sector personnel in healthcare and education	Education and education-industry alignment Participation of the elderly: healthy ageing policies Participation of women: access and affordability of childcare; participation of women in STEM Participation of migrants: management of quotas
Matching and reallocation	Active labour market policies: appropriate funding and targeting; career guidance for both unemployed and employed workers Adult learning: skills profiling tools; microcredentials Employment protection provisions Licensing and non-compete clauses	Active labour market policies: digitalisation of employment services Adult learning: quality evaluation and adjustment; skills anticipation exercises Housing policies Other anti-monopsony tools (antitrust)
Labour demand	Adult learning: policies encouraging firms’ investment in training, including of managers	Participation of women: financial inclusion and support to entrepreneurship Coordination between supply and demand policies

Note: Policies to “adapt” aim at taking stock of the current context in the labour and skills markets and adjusting to it. Policies to “anticipate” look at the longer-term needs and how the emergence of future shortages can be prevented.

Investment in education and lifelong learning is crucial

As skill shortages are a key dimension of labour shortages, adjusting the labour supply requires a major effort to scale up investment in education and training. Average education (PISA) test scores fell by 15 points between 2009 and 2022 across the OECD, with one-third of the reduction occurring before the COVID-19 pandemic. Recent OECD estimates suggest that education policy reforms could raise PISA scores by 10 points in the average OECD country. Promising areas of action include expanding early childhood education, enhancing teacher quality, implementing structured homework support and regulating digital device use in schools (Andrews, Égert and de la Maisonneuve, forthcoming). Furthermore, the digital transition calls for supporting STEM education. For example, Denmark reinforced cooperation between businesses, educational and research institutions and public sector operators (Klein and Smith, 2024).

Advanced technologies have also raised demand for soft skills, such as teamwork, communication and leadership. Both cognitive and social skills exhibit high labour market returns, especially when they are combined (Grundke et al., 2018; Criscuolo et al., 2021). In the United States, the share of jobs requiring high levels of social interaction grew by nearly 12 percentage points between 1980 and 2012 (Deming, 2017). In France, the share of jobs requiring both high mathematic and social skills increased by more than nine percentage points between 1982 et 2020 (Guadalupe et al., 2022). Changes to the education system can have important consequences for labour supply, but potentially with a longer lag.

Adjustments to the current labour force require an overhaul of lifelong learning policies to ensure that training systems are fit for the future and accessible to everyone. This, in turn, will increase the supply of suitably skilled workers in the market and decrease the incidence of skill mismatches within firms. As ongoing structural changes persist, a large share of employees will experience changes in the skills and tasks they need to perform on their job, but only 40% of adults in OECD countries participate in training in any given year, with the high-skilled more likely to train than the low-skilled (OECD, 2019b). The Nordic countries have long developed solid adult learning systems, partly thanks to strong cooperation between the social partners and with government institutions. Reforms in Austria, Estonia, Italy, Hungary and the Netherlands raised participation significantly over the past decades. Although these reforms vary widely, stakeholder engagement, adaptation to changing circumstances, responsiveness to result monitoring, training quality and alignment with labour market needs were common ingredients (OECD, 2020a).

Governments should prioritise long-term funding for lifelong learning systems and ensure that the allocated public resources are commensurate to the size of the transformations ahead. To grant sufficient and equitable access to reskilling and upskilling opportunities, public investment is essential. The design of public financial incentives (such as subsidies, tax incentives and subsidised loans) can encourage individuals and employers to invest to match market needs. However, market failures may result in inefficient investments in skills, leading to a mismatch between the skills employers need and those individuals obtain (OECD, 2017a).

Therefore, it is crucial to invest not just in more skills, but also in the right type of skills. Public investments should prioritise programmes that offer training for jobs in high demand in the labour market, or which target individuals and firms that have the lowest propensity to retrain. Financial barriers can be especially significant for unemployed and low-skilled individuals and for SMEs (OECD, 2019b). In many OECD economies, the rates of funding for courses depend on their relevance to labour market needs, or training is offered free of charge for the unemployed (OECD, 2017a). Several support instruments for SMEs are designed to be scalable and easy to comply with (e.g., subsidies and vouchers), or to grant privileged conditions to SMEs (e.g., training funds) (OECD, 2019b).

Asymmetry of information hampers investment in training by both workers and employers. Workers do not necessarily know the skills that are in current demand, or the job and training opportunities that employers are offering. Employers may not easily recognise the skills that are available on the market, nor the way job requirements may evolve in the future. Systems to assess and anticipate skills needs exist in most OECD countries, but their effectiveness is so far limited (OECD, 2016; 2023b). The necessary granular labour market information is often lacking or left unused by public employment services or employers seeking to hire. Coordination in the collection and use of such information needs to be strengthened across key stakeholders, including the social partners. Similarly, firm-level diagnostic tools help managers assess current skill gaps and predict future skill needs (OECD, 2021b).

Micro-credentials, i.e. short, focused learning modules that enable individuals to rapidly retrain and upskill, provide a flexible and efficient way for workers to acquire specific, high-demand skills without the time commitment of traditional degree programs. This enables a faster response to emerging skills gaps in the labour market, thus reducing talent shortages (OECD, 2023c; 2024c). It also allows firms to recognise that the prospective worker has invested in training in a given domain.

Enterprises are the primary source of reskilling and upskilling opportunities for adults. Investing in workforce training helps them adapt to technological advancements, integrate new hires and remain competitive. More than one out of three firms reporting recruitment difficulties in 2022/23 offers training opportunities to their existing workforce to ease labour shortages (Figure 2.20). This share is approximately the same as that of firms that offer greater flexibility in the work schedule and slightly lower than the share of firms that consider raising salaries and bonuses.

Figure ‎2.20. Firms facing severe shortages seek to increase wages and bonuses, work flexibility and training offer to attract workers
Copy link to Figure ‎2.20. Firms facing severe shortages seek to increase wages and bonuses, work flexibility and training offer to attract workers

Probability of implementing a given remedy against labour shortages, as a percentage of firms reporting severe difficulties recruiting

However, not all companies and entrepreneurs realise that they need to invest in skills and many are not proactive about their investment (OECD, 2021c). This is the case for the majority of SMEs (OECD, 2019b). Successful programmes therefore combine financial and non-financial support, where non-financial tools such as awareness raising, tailored contacts with beneficiaries and value chain-based initiatives, help firms recognise whether and how to invest. Lastly, firms’ ability to invest in human capital and raise productivity crucially relies on the skills of the company’s management and its attitude towards learning (Bender et al., 2018; Metcalfe et al., 2023). Coaching, mentoring and peer learning among managers and entrepreneurs have proved effective in promoting knowledge sharing and increasing the propensity of firms to offer training, in particular in SMEs (OECD, 2021d).

Multiple labour market policies can be mobilised to improve mobility and matching

Limited workers’ mobility restricts the movement of workers to areas or industries where their skills are in demand. When geographic, economic, or policy barriers prevent workers from relocating or transitioning to new jobs, businesses struggle to fill vacancies, worsening labour shortages. In 2022, essentially all sectors would have required hiring from the pool of unemployed from another sector to fill outstanding vacancies (Figure 2.21). For example, the share of postings that would remain unfilled if all unemployed in ICT or professional services were to be instantly matched to a job amounts to 8-9% of employment in the sector, on average across countries, a significantly higher number than in 2010. In the construction sector in 2010 the number of unemployed largely exceeded the number of job vacancies in the sector.

Figure ‎2.21. In 2022, all sectors required sectoral reallocation to fill vacancies
Copy link to Figure ‎2.21. In 2022, all sectors required sectoral reallocation to fill vacancies

Difference between vacancies and the country’s natural rate of unemployment (missing jobs without reallocation)

Active labour market policies (ALMPs), such as job placement services and career guidance, strengthen people’s motivation to search actively and accept suitable jobs and to increase their employability. ALMP systems that can respond to labour market challenges in agile and effective ways ensure that employment services are well funded and can scale up support to face both cyclical fluctuations and the demands of structural changes such as the green transition (Keese and Marcolin, 2023). They could be developed further in countries like Chile, Ireland and Spain. Lack of information on job possibilities and a negative attitude towards learning can pose significant barriers to changing career tracks in later life. Career guidance can help workers and the unemployed make meaningful educational, training and occupational choices. Such guidance is quite well developed in many countries for young people still in school, but remains underdeveloped for adults (OECD, 2021e). Profiling tools that take account of individuals’ prior learning and experience help to target support and thus decrease the cost of job displacement or job transitions (Meghnagi and Tuccio, 2022). The digitalisation of employment services can help deliver profiling and improve the matching of individuals with firms’ skill needs. Sectoral programmes are especially successful in raising the supply of “good jobs”, as they are oriented towards the need of particular employers and require much greater cooperation with them, and they offer customised services to job seekers (Rodrik and Stantcheva, 2021).

Effective activation strategies should be supported by unemployment and social-assistance benefit systems that reduce the financial burden of unemployment by offering income support during jobless periods. These benefit systems often serve as the primary mechanism for connecting unemployed individuals with employment services and active labour market programs, where benefit recipients receive job-search assistance and other resources. Additionally, the potential loss of benefits serves as a key incentive for individuals to actively engage in these programs (OECD, 2018a). In-work benefits could further stimulate marginal groups to participate to the labour market more fully, for example in Belgium. However, the design of tax and benefit systems should be free of implicit biases against specific groups and their specific realities, such in the case of women in a household.

Labour market institutions can also support workers’ mobility between jobs and from unemployment to employment. Shortages are less likely to emerge if workers can switch jobs without long periods of unemployment or change location if it becomes necessary. Employment protection provisions play a key role in shaping the rate of job reallocation. They can strengthen workers’ bargaining power and induce firms to at least partly internalise the social costs of hiring and dismissal decisions, in terms of unemployment benefit costs, psychosocial distress and income shocks (OECD, 2020b). A balanced approach to employment protection legislation ensures that regulations do not excessively raise termination costs, while still protecting workers from being hired on precarious contracts or unfairly fired and preserving viable worker-firm matches. Excessive turnover, or vastly unequal protection between permanent and temporary workers, may discourage investment in firm-specific skills and hinder innovation (OECD, 2018a). Stringent labour market regulations are associated with higher mismatch as they reduce labour market flexibility and the ability of firms to adapt to changing skill needs (Adalet McGowan and Andrews, 2015). For example, there is scope to reform labour market protection in Korea and Japan.

Occupational licenses, by imposing minimum standards of competence to practice for pay, make recruiting processes more costly and can reduce the pool of eligible applicants, generating an entry barrier into certain professions (Bambalaite, Nicoletti and von Rueden, 2020). In Europe and the United States, approximately 20% of workers are licensed (Koumenta and Pagliero, 2019). Reviewing regulations on occupational licenses could extend mutual recognition of entry requirements across jurisdictions, for example, or allow for a public subsidy to cover the cost of occupational licensing for workers in certain in-demand occupations. Other provisions can further enhance labour mobility by reducing the pervasiveness of labour market concentration and monopsony power. Monopsonistic competition is a frequent occurrence in OECD labour markets (Araki et al., 2022), which limits the number of outside options for workers who seek to change jobs. Expanding the scope of action of antitrust authorities to investigate mergers and no‑poaching agreements and a renewed effort to legislate over these phenomena can counteract employer power on the labour market (Araki et al., 2022). Non-compete agreements (NCAs) may also need to be reconsidered. There is little evidence that they can effectively promote innovation (Belenzon and Schankerman, 2013) and they can constrain the reallocation of workers across employers in the same sector and region. Promoting collective bargaining could also help contain monopsony power by enabling the negotiating parties to internalise the position of the firm in the product market, resulting in better sharing of rents between companies and workers (Araki et al., 2022).

Reducing firms’ monopsony power in the labour market would strengthen workers’ bargaining power, leading to higher wages. The negative impact of labour market concentration on wages has been found to be smaller when trade unions are stronger (Araki et al., 2022). Reducing monopsony power can also help improve job quality. During the high-tightness period following the pandemic, workers shunned jobs with low-pay and poor or strenuous working conditions, which could persist (Causa et al., 2022). Stronger workers representation can also mitigate the impact of labour shortages on job quality (Zwysen, 2024). The OECD Job Quality Framework highlights the need for action in three key dimensions to create more and better jobs: earnings quality; labour market security; and the quality of the work environment (OECD, 2018a). Areas for action include policies to enhance equality of economic opportunities, notably for women, older workers and migrants, and to promote social dialogue over pay, access to social protection and working conditions (Causa et al., 2024a). This can translate into higher labour market participation, investment in human capital and firm productivity, as well as higher workers’ well-being. A significant number of firms reporting difficulties recruiting contemplate raising wages and offering more work flexibility (Figure 2.20).

Better wages and working conditions would also help alleviate shortages in health, long-term care and education, where needs are growing due to, respectively, ageing and increasing demand for skilled workers, and where an increasing proportion of workers approach retirement. These activities are generally dominated by the government sector, where wages tend to be lower than in the private sector. In 2018, only 39% of teachers in OECD countries where data were available reported satisfaction with their salary, with only two-thirds satisfied with the other terms of their contract. The perception that their profession is undervalued by society and excessive administrative work also reduces the attractiveness of the profession (OECD, 2020c). To attract the brightest graduates into teaching, countries should have a comprehensive strategy for the professional development of teachers, as in Finland (Schleicher, 2019). The pandemic has exacerbated shortages of health professionals across the OECD, and population ageing will push up demand for health and long-term care services. Many OECD countries are taking measures to increase training capacity, strengthen financial incentives and improve working conditions in activities or areas with insufficient supply (such as rural areas) and introduce or expand the role of some health care professions, like nurses. Some countries are actively recruiting foreign doctors and nurses. However, this may exacerbate shortages in origin countries (Lafortune and Levy, 2023).

Better access to housing can improve labour matching by facilitating labour mobility, even though this potential is more limited when labour markets are tight in most places. In the United States, labour market tightness is a national phenomenon but shortages vary markedly across states (Fuller and Jefferson, 2023). Large differences in labour shortages are also observed across regions in France, Italy and Spain (Causa, 2024a). Differences in labour shortages among European Union countries offer opportunities for cross-border matching, especially in the construction sector (EURES, 2023). Difficult access to housing also hampers the integration of immigrants. In many OECD countries, migrant workers are more likely to live in segregated areas with poor housing and, more generally, living conditions (Causa et al., 2024a).

Housing has become increasingly unaffordable in many OECD countries, hampering residential and job mobility and especially moves to the most dynamic and productive agglomerations (Ganong and Shoag, 2017; Cavalleri, Luu and Causa, 2021). Loosening excessively restrictive land-use regulations, while preserving environmental sustainability and social inclusion, could increase the responsiveness of housing supply to demand, mitigating upward pressure on prices and making housing more affordable. This is for example the case in Sweden. In some countries, such as South Africa, reducing urban sprawl would also improve labour mobility.9 Social housing can facilitate lower-income household mobility, provided eligibility ruIes are designed in a way that avoids lock-in effects. Housing allowances can also support mobility, but risk being largely capitalised into rents if supply is tight. High transaction costs, excessively strict rent control and tenant-landlord regulations, as well as high costs for obtaining a building permit hamper labour mobility and skill matching (OECD, 2021f).

The shift towards lower density areas and working from home since the pandemic, part of which is likely to persist, may facilitate job mobility by broadening the range of location choices (Liu and Su, 2021; Ziemann et al., 2023). Policies to promote remote work allow workers to accept a position in the national labour market regardless of where a given employer is located. An effective mobilisation of telework policies to this effect, however, requires existing challenges to be addressed. Access to remote work is currently greater for workers that are highly educated, employed in large firms and in urban areas, and good quality digital connectivity is an essential condition.

Synergies with demand-side policies

Demand-side policies aimed at strengthening technology adoption, productivity growth, or the transition towards a greener economy can increase tensions in the labour market by raising the demand for labour and for certain skills that are not currently in large supply. Greater labour shortages can be experienced by growing firms and companies that are more likely to invest in technologies that require new or different skills. Policy actions to support productivity growth should also account for the potentially negative spillovers on labour market imbalances and should ensure that complementary policies are activated to minimise supply-side constraints.

Labour market participation should rise further in all age groups

The impact of demographic headwinds can be mitigated by higher participation rates, provided they translate into higher employment. Following the pandemic, labour market participation in OECD countries dropped, including because of poor quality of working conditions, especially in some essential sectors such as health and social care. While bad working conditions are likely to remain a constraint to employment in certain sectors, the decline in labour participation has been progressively reversed and OECD average labour participation rate has subsequently risen to an all-time high in 2024. Most countries are close to peak participation rates, the most notable exceptions being the United States and to a lesser extent the United Kingdom.

Nevertheless, some countries still have low employment among older workers, youth, or women, suggesting there is room to boost labour supply. In most countries, reaching the employment rates of OECD best performers in all age and gender groups could more than offset the drag from ageing on the employment-to-population ratio over the coming decades (Figure 2.22). For men, the potential to raise employment is largely at older ages. The scope to lengthen men’s working careers looks particularly high in Southern Europe and Türkiye. On average, there is wider scope to raise female than male employment. Many countries could raise female employment at both prime age and older ages. This is particularly the case in Latin America, Southern Europe and Türkiye.

Figure ‎2.22. Potential gains in employment from moving to the OECD employment frontier
Copy link to Figure ‎2.22. Potential gains in employment from moving to the OECD employment frontier

The increase in labour participation rates over the past decades has largely been driven by older workers, with the average OECD participation rates of the 55-64-year-olds rising by close to 18 percentage points since its 1994 trough and nine percentage points since 2010. This reflects better health conditions, higher education levels, the decline in physically demanding jobs, as well as the strengthening of incentives to continue working at older ages through pension and tax reforms. The continuation of the rising participation trend will hinge on promoting healthy ageing (Oxley, 2009; Kotschy and Bloom, 2023), including through equal access to health care and investment in occupational safety and health (OECD, 2017b), fighting discrimination against older workers (OECD, 2019c), enhancing lifelong learning to avoid skills erosion as technological change accelerates (OECD, 2019b), promoting age-friendly working conditions, including more flexible working-time and telework arrangements (André, Gal and Schief, 2024) and further reinforcing financial incentives to work longer (OECD, 2023d). Complementing pension reforms, governments should encourage older worker participation by promoting flexibility in work-retirement transitions, including through the possibility of combining pensions with work income (OECD, 2023e).

There is also scope in most countries to increase participation in younger age groups, especially among women. Facilitating the integration of women and youth in the labour market can alleviate labour shortages, while reducing inequalities. The OECD average gender employment gap was still nearly 14 percentage points in 2023, with substantial differences across countries. In some countries women still struggle to find jobs matching their qualifications and often suffer from a “child penalty” in their career development (Kleven et al., 2019). A range of policies can support female employment and reduce gender gaps, including improving access to high-quality and affordable childcare, incentivising parents to better share parental leave (for example in Austria and Italy), re-skilling and upskilling on return from parental leave, encouraging gender equality within firms, integration programmes for foreign-born women, promoting female entrepreneurship and financial inclusion and levelling taxation for second earners (for example in Belgium and Germany). Some of these policies can also stimulate fertility and increase labour supply as a consequence (André et al., 2023). Women are generally underrepresented in ICT occupations, which provide good jobs and often suffer from labour and skill shortages. Austria, Belgium, Poland and Slovakia have put in place measures encouraging the participation of women in ICT education and occupations (Eurofound, 2023).

The OECD average youth unemployment rate was above 11% in July 2024, more than double the overall unemployment rate of 5%, and exceeded 20% in 10 countries. More than 12% of 15-29-year-olds were not in employment, education, or training (NEET) in 2022, even though this share has been trending down over the past decade. Hence, there is potential to increase employment among youth. This is crucial to alleviate short-term labour shortages, and also to build a skilled workforce and reduce inequality and social exclusion (OECD, 2013). As mentioned above, education performance needs to be improved. The transition from school to work should also be facilitated, notably through second-chance programmes for young people who quit school without an upper-secondary degree and quality apprenticeships and internships (OECD, 2018a). For example, France introduced in 2016 a programme to help NEETs access ICT professions (Eurofound, 2023). Channelling support to young people would support school-to-work transitions and alleviate shortages of technical and vocational skills in the United Kingdom. Training and apprenticeships in sectors where labour shortages are high should be prioritised in Ireland.10

Immigration can help alleviate labour shortages

Net migration contributed significantly to population growth in most OECD countries over the past decade. Net migration inflows were particularly large in Luxembourg, Australia, New Zealand, Canada and Sweden. Conversely, Latvia, Greece and Lithuania suffered from net population outflows (Figure 2.23), despite a recent reversal in Lithuania. Permanent-type migration to OECD countries reached an all-time high of 6.5 million in 2023 (excluding Ukrainian refugees), 28% more than in 2019 and 54% more than in 2013 (OECD, 2024d). Although immigration is generally unlikely to fully offset population ageing, it can significantly contribute to alleviating labour shortages in the short to medium term, provided the migrants’ skills can be matched with labour market needs through well designed immigration and integration policies. For example, implementing a targeted migration strategy could alleviate labour shortages in Poland.11 Work immigration more than doubled since 2014 in OECD countries and accounted for a fifth of permanent-type migration in 2023 (OECD, 2024d). A surge in immigration boosted US economic growth following the pandemic (Dynan, 2024). A potential drawback is that emigration of skilled workers may deprive origin countries from necessary human resources (Jensen et al., 2019).

Figure ‎2.23. Migration flows contribute to population growth in most OECD countries
Copy link to Figure ‎2.23. Migration flows contribute to population growth in most OECD countries

Net migration, annual average 2010-2023

Figure ‎2.24. Employment is lower among foreign-born women than natives
Copy link to Figure ‎2.24. Employment is lower among foreign-born women than natives

Employment rate, 15-64 years

Policies need to effectively support migrants’ labour participation. The OECD foreign-born male employment rate is on average higher than that of natives, albeit with large differences across countries. Foreign-born women, however, have lower employment rates than natives in the majority of OECD countries (Figure 2.24). The child penalty is particularly high for foreign-born women. On average in the OECD, about half of migrant mothers with small children (up to four years old) are employed, 20 percentage points fewer than their native peers. The gap is largest in Belgium, France, Germany and Slovenia (over 30 percentage points) and lowest in Hungary, Czechia, Chile and Costa Rica (10 percentage points or less). Several factors contribute to this outcome, including less time spent in the labour market before childbirth and overrepresentation in elementary occupations that offer little financial incentive or institutional support for a return to work after childbearing. However, a lower use of formal childcare is often the main factor (OECD, 2023f). Improving access to affordable childcare could help raise the employment rate of mothers, with additional benefits for children, as high-quality early childhood education can be decisive for children’s development, especially for those from a lower socio-economic background (OECD, 2018b). In addition, programmes to reach out to migrant women, integration courses and participation of migrant women in training and other active labour market policies can enhance economic and social integration (OECD, 2020d).

Competition for talent has increased, even though on average immigrants to OECD countries still have lower educational attainment than natives. Governments are increasingly implementing selective labour migration policies with respect to specific skills, occupations and sectors (OECD, 2023f). For example, the Australian Skilled migration programme aims at filling positions where Australian workers are not available. Over recent years, Austria and the Belgian region of Flanders have expanded their shortage occupation list. Switzerland has relaxed immigration rules for skilled workers. Canada, Spain and Japan have eased immigration rules for people with high ICT skills (OECD, 2023f).

Policies need to help migrants access jobs that match their qualifications. Migrants often perform jobs for which they are overqualified, even after several years in the host country. Governments should address this issue by ensuring better recognition of foreign qualifications (for example in Canada), encouraging and providing support for language learning and fighting discrimination (OECD/European Union, 2014). Specific measures can support the integration of migrants in sectors suffering from labour shortages. Several countries, including Austria, Korea, Spain and Switzerland have established vocational language courses in specific sectors where labour demand is high (OECD, 2023f). Germany also introduced free digital courses for migrants, asylum seekers, refugees and other citizens without access to digital education or a professional network in 2015 (Eurofound, 2023).

Conclusion

Copy link to Conclusion

Labour markets are cooling after significant tightness during the recovery from the COVID-19 pandemic, yet labour shortages persist and are severe in high-skilled jobs and in occupations characterised by low pay and strenuous working conditions. Young and low-productivity firms face more serious shortages than older and more productive companies. Nevertheless, high-productivity firms tend to report difficulties in hiring high-skill professionals. This is likely related to changing skill needs by the digital and green transitions, which rely critically on the availability of competent workers. At the same time, population ageing and low fertility will increasingly weigh on labour supply in the years to come.

Policies have a key role to play in alleviating labour shortages. Strengthening education and training systems would provide firms with the human resources they need for their development and workers with better job opportunities. In low-pay and strenuous occupations, improving job quality, in terms of wages, working conditions and safety, flexibility and job security, will be necessary to tackle shortages Labour market policies that can facilitate mobility and matching are also essential. There is scope to raise labour participation in all age groups, notably by improving work-life balance. Immigration can further help mitigate labour shortages, provided effective integration policies are in place. In a period of rapid technological progress, better mobilising human resources and skills will remain crucial for economic growth and well‑being.

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Notes

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← 1. Tightness is defined as the number of job vacancies per unemployed person.

← 2. The results of the Business at OECD (BIAC) Economic Policy Survey 2024 confirm that labour markets are cooling, even though labour shortages remain concerning. In 2024, 89% of respondents were concerned about labour shortages, as opposed to 95% in 2023. Similarly, 19% of respondents were very concerned in 2024, down from 58% in 2023 (BIAC, 2024).

← 3. This pattern also broadly holds for most of the individual countries in the euro area for which data are available in this period (Consolo and Dias da Silva, 2019).

← 4. The estimates of sectoral tightness assume that the unemployed whose previous job was in sector j look again for employment in j. There is evidence that cross-sectoral mobility is limited by important fixed costs and wage losses for workers, which are determined by industry differences in the specific knowledge embedded in production (Dix-Carneiro, 2014). Further correcting the series of official statistics on unemployment to include workers on job retention schemes (where this is not typically the case) does not change the long-term picture.

← 5. Firm-level difficulties in finding personnel complement the information provided by tightness on the state of the labour market. For a given level of matching efficiency, a larger increase in vacancies than unemployment translates into greater difficulties for firms to recruit, i.e. into greater labour shortages as defined in the GFP Employer Module. However, in theory, difficulties in recruitment can worsen even without a change in tightness, if vacancies and unemployment increase by the exact same amount, corresponding to decline in matching efficiency. On the downside, the survey indicators may provide an inaccurate picture of the real state of the labour market if they capture firms’ perception of shortages. They may also capture firms’ inability or unwillingness to organise recruitment in a professional way.

← 6. This is in line with the long-standing pattern of more severe shortages in high-skill sectors, highlighting the role of demand-side factors as discussed earlier.

← 7. 42% of the net job gains in the OECD between 2006 and 2016 took place in highly digital-intensive sectors (OECD, 2019a).

← 8. While the adoption of certain labour-saving technologies may be motivated by shortages themselves, dropping from the sample the firms declaring having done so does not change qualitatively the relationship between changing technology and shortages in Figure 15. A similar concern is less likely to apply for changes in green technologies at the firm level.

← 9. See country notes in Chapter 3.

← 10. See country note in Chapter 3.

← 11. See country note in Chapter 3.

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