The worst effects of the recession – unemployment, underemployment and inactivity – risk becoming ‘permanent features’ of the European economy, according to a new report published by IPPR today as part of JPMorgan Chase’s New Skills at Work programme.

Figures in the report show 27.7 percent of the EU working-age population are economically inactive, 10.4 percent of the labour force is unemployed and 5.8 percent underemployed. In the UK, despite strong employment growth and rising real wages, productivity remains its biggest challenge – its output per hour worked is roughly 17 percent lower than it would have been had the pre-crisis trend in productivity growth continued.

The report also finds the UK’s in-work training has fallen by 4 percentage points since 2008, the largest fall of any EU28 country. The apprenticeship levy and the three million apprenticeships target are welcome, but further cuts to further education and adult skills in the Spending Review could hold back attempts to increase productivity.

The UK’s path to a high-productivity, high-pay economy will be best paved by developing a highly skilled workforce and ensuring effective skills utilisation. IPPR says George Osborne must use his Spending Review this week to announce new investment in productivity-boosting measures, to recover lost growth in output per hour, as well as in pay and living standards. The challenges facing the European economy will be addressed at a high-level European Jobs and Skills Summit, held today by IPPR, JP Morgan Chase and the CIPD, bringing together business leaders and policymakers from across the continent. It will launch a new report, which takes a comprehensive look at trends in employment and skills development across the EU28, and in Europe’s five biggest economies: Germany, the UK, France, Spain and Italy.

It finds the long-term erosion of skills in the workforce requires means European policymakers need to ensure better in-work training and provision of lifelong learning. This will allow workers to progress and earn higher wages, and allow firms to boost productivity and profits. However, the research warns cyclical underperformance of the economy caused by the financial crisis and recession could become structural. Globalisation, rapid technological progress and other economic developments are all leading to changes in the skills that employers require. It means unemployment that begins as a cyclical phenomenon can become structural if skills are allowed to erode over time, or to become redundant, leaving a gap between the skills employees need and would-be workers have.

The report suggests European countries should look to Germany – an economy characterised by high productivity rates – to draw lessons and adapt these to address the challenges they face at home. Germany invests considerable funds in research and development: at 2.9 percent of GDP in 2013, investment is well above the EU average (2 percent): this investment, in turn, supports productivity. To emulate this success, the report highlights three priorities to meet the challenge: Tackling youth unemployment: Young people need to be supported in their transitions from education to work with better careers advice, more integrated work experience opportunities and greater employer involvement in the education system.

Upgrading skills and boost productivity: European policymakers need to ensure that the existing workforce has more and better in-work training and lifelong learning if firms’ skills needs are to be met. This will support workers to progress (and earn higher wages), and allow firms to boost productivity and profits. 

Matching training to skills needed: Existing workers need greater support to continually upgrade their skills, with stronger incentives for employers to invest in their workforces.  For those whose skills become obsolete, retraining and reskilling opportunities are needed for workers to fulfil their potential, and develop the skills that new industries require.

Catherine Colebrook, IPPR Chief Economist, said: “Europe has struggled to exit recession in the wake of the global financial crisis, and this is reflected in its labour market performance in recent years. While countries such as the UK and Germany have relatively strong labour markets, in southern European countries there is a real risk that long-term unemployment becomes entrenched even as their economies return to growth. European economies need to create more high-productivity, well-paid jobs and to ensure that its workforce has the skills that employers will be demanding in future.

“For the UK, the task for policy makers will be to ensure that the UK continues to invest in developing the skills it needs to compete globally. It is striking that adult participation in education and training in the UK has fallen since 2008 by more than in any other country, at a time when participation has increased across most of Europe. Investment in the country’s skills should be a priority for the Chancellor: instead skills funding looks likely to be cut drastically in the forthcoming Autumn Statement, which will inevitably have knock-on effects to our productive potential.”

Chauncy Lennon, Head of Workforce Initiatives, JPMorgan Chase & Co, said: “Too often people are unable to compete for work because their qualifications and skills do not match what’s required for available jobs. This mismatch reduces opportunities for economic mobility and business productivity. By supporting solutions that equip people with training and skills employers need, J.P. Morgan and its partners are helping boost skill levels, progression and, consequently, wages to ensure the economic recovery is widely shared.”