The magnitude and longer duration of unemployment (see part I) has raised concerns that the cyclical increases in joblessness might eventually turn into structural unemployment. The share of the long-term unemployed, i.e. persons being out of work for more than 12 months, has been constantly rising in the EU since mid-2009 and climbed to 46% in the fourth quarter of 2012.

In addition, unemployment among the young (15 to 24 years) who are not in education or training is high. In particular, the lack of on-the-job training and experience is likely to jeopardize the future employability of young workers which in turn might dampen a future labor market recovery, most notably in vulnerable Member States.

According to European Commission estimates, the no accelerating wage rate of unemployment (NAWRU), a gauge of structural unemployment, has indeed increased substantially since 2008 and indicators of labor-market mismatch have worsened. But some caution is warranted as to the long-term trend of structural unemployment given that NAWRU estimates are influenced by a broad range of factors, for example labor market adjustment frictions and large negative shocks.

The modest recovery in economic activity predicted for 2014 is likely to help stabilizing the labor market situation. Reduced uncertainty and a firming recovery are expected to give rise to modest employment growth in 2014 of around ½% in the EU and ¼% in the euro area. Given the projected growth in the labor force, the unemployment rate is likely to stabilize at elevated levels in 2014, at slightly above 12% in the euro area and at around 11% in the EU.

Visible improvements in the EU and euro-area labor market are expected only towards the end of the forecast horizon, as the necessary reallocation of resources from the non-tradable to the tradable sector in vulnerable Member States is likely to take time and to be hampered by weak economic prospects as well as financing constraints on investment.

The labor market performance differs widely across Member States and large growth differentials will entail a further widening of those divergences in 2013. Unemployment rates are expected to range between less than 5% in Austria and 27% in Spain and Greece.

The varying labor market situation across countries is also reflected in diverging wage developments. Since 2011, real wages increases have lagged behind productivity growth in most high-unemployment countries facing substantial internal and external adjustment needs.

Looking ahead, wage moderation is set to continue in vulnerable Member States, supported by recently adopted reforms in the wage-setting system, allowing for a further gradual improvement in price competitiveness. By contrast, a marked rise in unit labor costs was observed in countries with relatively low unemployment in the post-crisis years up 2012 and real wages per head are set to grow faster than in the pre-crisis years of 2003-07, notably in Germany.