Economic growth, skills shortages remain strong in new EU states

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Despite recent global financial market turbulence, economic growth in the new European Union member states remains high, according to the World Bank's EU8+2 Regular Economic Report. There is also evidence of an emerging shortage of skilled workers in Central and Eastern European nations that joined the EU in 2004 and 2007.

"The forces associated with the current financial market turbulence will take some time to play out fully, but at present it appears the [new member] countries have been relatively unscathed," said Ron Hood, Lead Economist at the World Bank and the coordinator of the Report.

The report noted that the current financial turbulence following developments in the U.S. housing market represents a test of the vulnerabilities facing the new member states.

The authors of the report pointed out that unemployment in almost all of the new member states has fallen sharply since 2004 due to increased demand in the labor market. Because of this, skills shortages and wage pressures have risen sharply.

Increased migration to Western Europe has not helped the situation. Countries such as the United Kingdom and Ireland have witnessed thousands of Polish and Latvian workers enter their countries looking for work since their accession to the EU.

While unemployment rates are dropping, many persons of working age are not economically active in the new member states, either because they lack the skills employers want, or because of disincentives such as early retirement benefits, high payroll taxes, and limited opportunities for flexible work arrangements. Younger and older workers are more affected by these problems while economic activity of middle aged workers is similar to those of western European nations.

The report highlighted the need for the new member states to mobilize the workforce to meet the new demands set forth by their stronger economies. Addressing the skills shortage is seen as particularly important -- failing to do so will constrain job creation and future economic growth.

The authors stated that to increase the effective labor supply, the new member states need to improve employment incentives by reforming social security systems, improve worker skills through reforming the education system, improving domestic mobility, and opening the labor market to foreign workers.

"The weights assigned to each policy depend on the nature of the most binding constraint to labor supply, which vary across countries," said Jan Rutkowski, World Bank Lead Economist.