With Blunt Criticism, ECB Says
Labor Mismatches Hinder EU

FRANKFURT -- Austria has too many construction workers and too few hairdressers. France suffers from an abundance of woodworkers but a shortage of nurses.

Labor mismatches like these plague the euro zone, damping economic growth and explaining why firms have a hard time finding qualified employees despite an 8.3% jobless rate last year, the European Central Bank said in a report.

The report comes a few days ahead of a meeting of European Union leaders in Barcelona, where improving the labor market and making Europe more competitive is slated as a major theme. The report is remarkable because the ECB points to specific problems in particular countries, something it rarely does in public and underscoring the bank's concern over the matter. The ECB singled out France, Germany and Spain as countries that need to address labor issues.

The 12 countries that share the euro made some headway in the 1990s in creating jobs and lowering unemployment. But while this was going on, those people without work increasingly failed to qualify for jobs for either educational or geographical reasons. This suggests the jobs market isn't adapting to the "increasingly competitive global environment and rapid technological change," the ECB said.

The ECB believes the euro zone can improve paltry growth rates only through significant reforms, particularly to the labor market. As it currently stands, the euro-zone economy can only expand at a rate of between 2% or 2.5% without stoking inflation, the ECB believes, a whole point below the 3% to 3.5% most economists estimate for the U.S. "The euro area's economic potential is not fully exploited," the ECB said.

The ECB is particularly concerned with the labor market because labor shortages in certain fields may result in higher inflation by putting upward pressure on wages. In addition, the smooth functioning of the job market is of special importance in the euro zone because individual countries can no longer resort to national monetary or exchange-rate policy to cope with shocks to the economy. ECB officials privately fear that national elections in France and Germany this year may stall needed reforms.

The ECB found that Germany, France, Ireland and Austria have become increasingly vulnerable to educational mismatches, in which the unemployed don't have the skills employers seek. Belgium, Germany and Italy are especially subject to geographic mismatch because there are too few incentives for job candidates to move from one region of the country to another.

In general, the ECB called for increased wage flexibility, better education, greater labor mobility, and less-restrictive employment-protection regulation. The bank, which sets interest rates for the euro zone, said that "much more remains to be done" for labor-market reform.

In its uncharacteristic finger-pointing, the ECB noted:

Write to G. Thomas Sims at tom.sims@wsj.com¹

Updated March 12, 2002