Emerging Structural Pressures in European Labour Markets

In recent years, a series of European labour market forecasts have been produced on behalf of, and have been published by, the European Centre for the Development of Vocational Training (Cedefop). These forecasts were generated using a modular modelling approach containing two major components, a multi-sector macroeconomic model (E3ME) for 29 European countries, and a labour market extension (WLME). The countries are treated as an integrated system in E3ME but the extension is applied to each country separately. Forecasts of employment by industry are determined by E3ME; forecasts of employment by occupation and qualification are determined by the extension. Both components rely mainly on time series econometric techniques to generate their forecasts. Meagher et al.(2014) describe how the WLME can be replaced with an alternative extension (MLME) which uses computable general equilibrium (CGE) modelling techniques. Compared to the WLME, the MLME relies less on time series analysis and more on explicitly modelled economic behaviour, based on theoretical considerations. In this paper, the design of the hybrid E3ME-MLME model is advanced in two ways. Firstly, MLME is configured such that, in the absence of any shocks and assuming that the occupational labour markets clear, it reproduces the forecasts derived using WLME. In that case, the MLME forecasts can be regarded as providing enhanced information about the WLME forecasts. In particular, MLME provides forecasts of changes in relative wage rates which can be used to identify structural pressures in the markets for labour, pressures which remain only implicit in the WLME employment forecasts produced for Cedefop. Secondly, when suitably configured, MLME can be used to determine the deviations to the WLME employment forecasts which would result if some of the conditions (either explicit or implicit) under which they were derived are relaxed. In particular, MLME is used to determine how the forecasts would be different if wage rates are not sufficiently flexible to clear the occupational labour markets. The attendant surpluses and shortages revealed by MLME provide corroborative evidence on the underlying structural pressures in the Cedefop forecasts. Results are reported for the United Kingdom, Greece and the Netherlands.