COMMUNICATION FROM THE COMMISSION TO THE COUNCIL - Draft Joint Employment Report 2003/2004

EXECUTIVE SUMMARY

This Joint Employment Report (JER) provides the first assessment of the progress made by Member States in implementing the new Employment Strategy agreed for 2003-2006: A strategy based around the three over-arching objectives of full employment, quality and productivity in work and strengthened social cohesion and inclusion.

The report is released at a time when the goals of the Lisbon strategy are being seriously challenged by the labour market situation. Europe continued to feel the impact of the economic downturn throughout most of 2002 and 2003. Employment growth came to a standstill by the beginning of 2003 and is expected to rise only slowly over 2004-2005. Unemployment has gradually increased to 8.1% in 2003. The reforms undertaken over the past few years have made Europe's labour market more robust in adapting to shocks, but unless the economy picks up, and further labour market reforms are implemented, there is a risk of stagnation in employment, and of higher unemployment and inactivity.

Progress towards the Lisbon 2010 target of a 70% overall employment rate has come to a standstill and, at 64.3%, it is now clear that the EU will miss the intermediate employment rate target for 2005 of 67%. The employment rate for women improved in 2002 (55.6%), and remains on track towards the intermediate target for 2005 (57%). Progress towards the target for 2010 will crucially depend upon improvements in the employment rate of older workers. Although this rate has increased to just over 40% in 2002, the target of 50 % for 2010 is a considerable way off.

In the face of the economic slowdown, and reflecting a strong concern from Heads of State and Governments to intensify the momentum for structural reforms, the 2003 Spring European Council invited the Commission to establish a European Employment Taskforce, under the chairmanship of the former Prime Minister of the Netherlands Wim Kok, to report to the European Commission on practical reforms that can have the most direct and immediate impact on the implementation of the Employment Strategy. The December 2003 Brussels European Council invited the Commission and the Council to consider the Taskforce report in the preparation of the Joint Employment Report.

The Employment Taskforce concentrated on the need to increase both employment and productivity growth and identified four key conditions for success: increasing adaptability of workers and enterprises; attracting more people to the labour market; investing more and more effectively in human capital; and ensuring effective implementation of reforms through better governance. The Taskforce identified priorities for action of general relevance for Member States under each of these headings and specific messages on the reforms needed to each of the fifteen current and the ten new Member States. The Employment Taskforce's assessment and policy messages are shared by the Commission and the Council and, since they are fully consistent with the European Employment Strategy Guidelines, have been closely integrated into this Joint Employment Report.

The Three Over-arching Objectives:

In their response to the objective of full employment, some Member States have displayed a wider commitment by setting national targets, either in the form of employment rate targets or an objective of employment creation. Some of these targets reflect more ambition than in the past. The setting of targets needs to be backed up by rigorous implementation of reforms. The National Action Plans (NAPs) illustrate that the pace of labour market reform has continued, and in some cases been stepped up, especially reforms to increase participation and labour supply. However, reforms to improve the environment for job creation are more piecemeal.

The EU has also seen a worrying decline in labour productivity growth over the past decade. In contrast, the US has been able to combine a strong employment performance with acceleration in labour productivity. Productivity is predominantly illustrated within the NAPs as an objective in its own right; the link with better quality in work is not as well explored. However, recent performance concerning quality in work is encouraging [1]. Although there is scope for improvement, progress can be seen in terms of education and skills, gender gaps (except the pay gap), and safety at work.

[1] "Improving quality in work: a review of recent progress" Commission Communication COM(2003) 728

The NAPs demonstrate that employment plays a vital role in fostering social cohesion and inclusion. Some Member States adopt a 'making work pay' approach favouring across the board social security and taxation reforms. Others focus on tailor-made measures for specific groups. Many Member States stress the importance of a multidimensional approach extending beyond labour market policies to tackle regional and social disparities.

The Specific Guidelines:

Prevention and Activation

Preventative and active labour market policies are essential in order to tap the potential of the workforce and are even more crucial in periods of economic slowdown. In line with the strengthened approach in the new guidelines, progress can be seen in ensuring all the unemployed benefit from individual job search and guidance services at an early stage of unemployment, and a new start tailor-made for each unemployed person before reaching six or twelve months respectively for young people and adults. However, substantially less attention is given to the participation of inactive persons (in particular women). Member States are committed to modernising Public Employment Services, with some moving towards cooperation with the private sector. Only a minority of Member States provide data on the effectiveness of activation measures, and more effort is needed to provide comparable activation and prevention indicators to allow an assessment of progress.

Entrepreneurship

More must be done to tap the job creation potential in the EU through an improved business environment and by fostering business capacity to innovate. Most Member States aim to facilitate start-ups, lower the administrative burden, and expand business support services. Several have set up taskforces on the simplification and improvement of regulation, including bankruptcy laws. Access to funding for start-ups and existing SMEs is receiving increased attention, but remains a major bottleneck. To make entrepreneurship a career option for all, many Member States include managerial training in all levels of education, with some providing targeted action towards underrepresented groups. Stimulating innovation and R&D and spreading its results more effectively across the economy remains a challenge.

Address change and promote adaptability

Member States, social partners, enterprises and workers must increase their capacity to anticipate, trigger and absorb change. In addition to action necessary under other relevant specific guidelines, the need to strike a more effective balance as regards flexibility combined with security in the labour market is increasingly recognised. Attractive contractual arrangements must be available to meet the needs of both employers and workers and avoid the emergence of a two-tier labour market. There is evidence of a trend towards greater flexibility through changes to working time patterns and the working environment. In a number of Member States attention has shifted towards introducing flexibility into standard contracts, improving working conditions, and reducing the number of accidents at work and occupational diseases. Actions to promote geographical mobility remain underdeveloped, and tend to focus on reducing regional disparities. The management of restructuring receives insufficient attention.

Develop Human Capital

Europe needs to invest more and more efficiently in human capital. A much greater effort is needed if the EU is to have any chance of reaching the 2010 targets of 85% of 22 year-olds completing upper secondary education and 12.5% of the adult population participating in education and training. A number of Member States are making efforts to reform lifelong learning systems to deliver a more demand led system and make opportunities more adapted to individual needs. Only a few Member States show a commitment to increased and more efficient investment in human capital. Strategies to increase private investment (from the individual or firm) remain partial. Reforms to encourage individuals to invest focus on the use of financial incentives. Many initiatives target the recognition and certification of non-formal or workplace learning to recognise existing skills. Social partners are more involved in the design and delivery of training, with increasing use of collective agreements. The sharing of costs and responsibilities needs to be improved and become more transparent.

Increase labour supply and promote active ageing

Increasing the labour supply is indispensable for increasing employment and economic growth in the medium and longer-term. Reaching the 70% employment rate target depends crucially on significantly increasing the employment rate of older workers and on extending the average exit age from the labour market. A growing number of Member States are implementing national ageing strategies, applying a range of measures focusing on benefit reforms, improving the working capacity through better access to training, and better working conditions. A strong focus is placed on pension reform, including increases in standard retirement age and discouraging early retirement. However poor management of economic restructuring, voluntary early retirement schemes and existing disincentives within statutory retirement schemes are preventing the employment rates of older workers from picking up significantly. It is vital that Member States develop comprehensive strategies to increase labour force participation. Raising female participation is a critical part of the ageing challenge, and Member States cannot rely on cohort effects alone to meet the targets. Immigration is considered an important source of additional labour supply for professions or sectors encountering recruitment difficulties.

Gender Equality

Tapping the potential of female participation is both an issue of gender equality and a matter of economic effectiveness. Many Member States aim to increase female participation and reduce employment and unemployment gaps, primarily through policies to reconcile work and private life. However the underlying factors of gender gaps in employment, unemployment and pay (for example gender segregation, taxation and wages) are not well addressed. Many Member States present a range of measures which should have a positive impact in reducing the gender pay gap, but most actions are piece-meal, especially in countries with the highest gaps. Many initiatives remain voluntary with a lack of evaluation of impact. Childcare is presented as a priority in most Member States, but the approach often varies in focus and ambition, and insufficient attention is given to its quality and affordability. Gender mainstreaming continues to be non-systematic, lacking gender impact assessment of existing systems and new policies.

The integration of the disadvantaged

A more effective integration of people facing particular difficulties in the labour market is key to increasing labour supply and reinforcing social cohesion. Most Member States present policies to reduce the numbers of early school leavers and to improve the labour market situation of people with disabilities, migrants and ethnic minorities. However significant gaps remain and effort needs to be intensified and expanded to encompass other people at a disadvantage such as the low-skilled, social benefit recipients and lone parents. Employers should be more involved in achieving the objective of increased participation of disadvantaged people.

Making work pay

In order to raise labour force participation and to promote inclusive labour markets, it is essential to reduce remaining unemployment, inactivity and poverty traps. An increasing number of Member States are pursuing reforms to make work pay by addressing the combined impact of taxes and benefits. Reforms largely focus on reducing taxes, and introducing in-work benefits, which have been introduced or are planned by a growing number of Member States. Some Member States have tightened qualifying conditions for the eligibility or duration of benefits, but reforms of benefit systems are not sufficiently comprehensive. Several Member States still need to tackle the disincentives to take up a low paid job, in particular by addressing the situation for inactive, and by considering the non-financial incentives to taking-up a job, including aspects related to quality in work. Further benefit, tax and pension reforms aiming to encourage older workers to remain longer in work is needed, particularly in Member States with low employment for older workers. Member States should pursue efforts to reduce non-wage labour costs, particularly for the low-skilled and those on a low wage.

Transforming undeclared work

Undeclared work creates unfair competition between businesses and acts against a lasting integration of the workers concerned in the labour market. The NAPs confirm the increased commitment of Member States to address undeclared work through a more integrated approach, combining the simplification of the business environment, reforms in tax and benefit systems, improved law enforcement and the application of sanctions. More needs to be done to understand the nature and extent of the problem. A number of measures are reported by Member States to simplify administrative procedures and the registration of employment and social security contributions and to improve coordination between relevant authorities. In addition, to enhance work attractiveness several report on tax measures to prevent undeclared work and make work pay. Many Member States take measures directed at foreign workers or illegal immigrants, such as better information on labour market rights and greater control of working conditions.

Address regional disparities

Employment and unemployment disparities between regions remain significant, and will increase with enlargement. Research confirms a strong correlation between investment in human capital and economic performance at national and regional level, making investment an important tool of regional cohesion policy. The role of the European Social Fund is key in this respect.

Good Governance and Partnership in the Implementation of the Guidelines

The success of employment policy depends on the quality of implementation. The 2003 NAPs are generally well developed baseline documents but only rarely constitute the central instrument for discussing and defining national employment priorities. In particular the involvement of parliamentary bodies needs to be raised in profile. Social Partners as well as regional and local authorities are seen as important partners for national governments but their involvement in the NAPs could be improved.

Member States are increasingly attempting to report on budgetary priorities in the NAPs, but the information remains patchy. Information on the implementation of the NAP and on delivery services concentrates on the role of the PES, and little consideration is given to other delivery services such as education and training, and social services.

There is a need to improve governance of employment policies at national and EU level. At national level this implies building reform partnerships, formulating ambitious employment policies with targets reflecting those fixed at EU level, and using the NAPs more effectively as central planning and monitoring documents bringing together the different elements of reform. At European level this implies strengthening the role of EU country-specific recommendations, targeting more closely EU funds to address the Lisbon agenda, encouraging strong commitment from the European Social Partners, and reinforcing dissemination and systematic and more open mutual learning through exchange of experience.

INTRODUCTION

This Joint Employment Report (JER) provides the first overview of the employment situation and an assessment of the progress made by Member States in the implementation of the new set of Employment Guidelines agreed for the period 2003-2006 with three over-arching objectives: full employment, quality and productivity in work and strengthened social cohesion and inclusion. The Joint Report contains both an analysis of progress across the EU under the major agreed objectives and guidelines, and a brief country by country review. Key and context indicators agreed by the Employment Committee underpin the analysis and are provided in the annexes.

Title VIII of the Treaty establishing the European Community lays down the principles and procedures for developing a co-ordinated strategy for employment. Article 128 sets out the specific steps leading to the formulation of such a strategy. This includes, on an annual basis, guidelines for Member States' employment policies; Each Member State provides the Council and the Commission with an annual National Action Plan on the principal measures taken to implement its employment policy in the light of the guidelines. The examination of the National Action Plans results in the presentation to the European Council of a Joint Employment Report of the Council and the Commission on the employment situation for the EU and on the implementation of the guidelines for employment. On the basis of this report the European Council adopts each year conclusions that, in turn, may give rise to a reformulation of the Guidelines. Moreover, on a recommendation from the Commission, the Council addresses appropriate recommendations to the Member States.

The European Employment Strategy (EES), which has been developed according to the above institutional framework, is a major contribution to the wider EU political agenda defined at the Lisbon Summit and subsequent European Councils. In the context of a streamlining decided upon in 2002, of the policy co-ordination cycle, the major areas contributing to the Lisbon agenda, this Joint Employment Report, the Implementation Report on the Broad Economic Policy Guidelines and the Implementation Report on the Internal Market Strategy are presented as part of the "Implementation Package" designed to synchronise and strengthen policy coordination and coherence.

While the National Action Plans for Employment submitted in Autumn 2003 by each Member State constitute the main contribution to this report, a major input to this year's JER is the report submitted by the Employment Taskforce constituted at the request of the Spring 2003 European Council, under the chairmanship of Mr Wim Kok, former Prime Minister of the Netherlands, who presented his report to the European Commission on 26-11-2003 [2].

[2] "Jobs, Jobs, jobs - Creating more Employment in Europe" Report of the Employment Taskforce chaired by Wim Kok

On this basis, in the final section this Joint Employment Report outlines key messages for the spring 2004 European Council.

1. THE POLITICAL AND ECONOMIC CONTEXT

This Joint Employment Report is released at a time of cautious optimism for a recovery in EU labour markets. The employment policies and structural reforms undertaken over the past few years have made Europe's labour market more robust in adapting to shocks, as demonstrated by the relative resilience of employment over the recent period. We now start from a better position to ensure a resumption of growth and high employment, although it should be borne in mind that labour hoarding and the lagged effects of the economic cycle on employment will delay the increase in employment. The new European Employment Strategy provides an integrated and coherent response to the employment challenges facing the EU. This report examines the commitments made by Member States under the new European Employment Guidelines and points to areas where progress and delivery are most pressing. Action now will help underpin the recovery of the economy and employment.

1.1 EMPLOYMENT GROWTH AT A STANDSTILL

After an initial strong resilience of the EU labour market, the impact of the economic slowdown has started to be felt more strongly.

Labour market developments since the start of the recent economic slowdown indicate that EU employment now resists better than in the past to weakness in economic activity. Indeed, the reaction of employment to the recent slowdown has so far been much more moderate than in the previous slowdown of the 1990s. This reflects a path of job creation and destruction different to that of the early 1990s, with smaller declines in employment so far in agriculture and industry, while the service sector has created far more jobs.

The current resilience has essentially been a consequence of changes in the European labour market that occurred over the second half of the 1990s and which affected the mechanisms linking employment and participation with the economic cycle. Altogether, the combined effects of rising female and youth participation, the increasing skill level of the working age population and greater availability of new types of contracts facilitated the development of an employment-intensive growth pattern, which was also supported by more employment-friendly wage setting by the social partners and cuts in non-wage labour costs.

Europe continued to feel the impact of the economic downturn throughout most of 2002 and 2003, with GDP growth under 1%. After several years of strong job creation employment growth came to a standstill by the beginning of 2003. The downward trend in unemployment reversed by mid-2001 and levels have gradually increased from the 2001 low of 7.3% to 8% in 2003. Employment is expected to rise only slowly over 2004-2005.

For 2004 there is a risk of continuing stagnation in employment, and possibly higher unemployment, unless the economy picks up, and further labour market reforms are implemented. Even with a modest economic recovery, employment growth may be limited since it can be assumed that enterprises have hoarded labour in the recent slowdown. Growth in labour supply is essential to meet the Lisbon targets, but with labour force growth expected to exceed employment growth, unemployment may well continue to grow in the near future.

1.2 THE MEDIUM TERM EMPLOYMENT STRATEGY REMAINS VALID

Employment performances are a key component of the Lisbon goal defined in 2000, to make the EU the most competitive and dynamic knowledge - based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion. They are closely inter-related with major areas of reform in pensions, education, research and social inclusion as well as product, services and labour markets.

The new European Employment Strategy (EES) has been designed to support the Lisbon goals. The new guidelines fix the three overarching and complementary objectives: full employment; quality and productivity at work; and social cohesion and inclusion. Ten specific fields for action have been identified to support these objectives. The guidelines also cover action to improve the governance of employment policies.

In the face of the economic slowdown, the prolonged uncertainty as to the timing and scale of the recovery, and reflecting a strong concern from heads of States and Governments to keep up and intensify the momentum for structural reforms, the 2003 Spring European Council invited the Commission to establish a European Employment Taskforce, under the chairmanship of Wim Kok, former Prime Minister of the Netherlands, to help identify practical reforms that can have the most direct and immediate impact on the implementation by Member States of the Employment Strategy.

Recognising the structural improvements achieved in a number of Member States and the rise of employment from the mid-1990s to 2002 in the EU, the Taskforce warns that the European Union is at risk of failing in its ambitious goal set at Lisbon in 2000. Unless the Member States step up their efforts, it is looking increasingly unlikely that the overarching goal for 2010, and the employment objectives, will be attained.

In responding to the slowdown Europe should not lose sight of the wider, longer-term challenges it is facing. Globalisation and economic integration are increasingly affecting the way Europeans live and work and demanding for a rapid response to, and management of, change. The rapid ageing of the population is calling into question Europe's ability to remain competitive and achieve higher employment and economic growth in the future.

Rather than engaging in a process of further changes in EU guidelines the Taskforce considers that the emphasis at EU level should now be on stronger monitoring of reforms undertaken by the Member States. The present report examines the response given by Member States to the full range of the Employment Guidelines taking into account the assessment and proposals of the Employment Taskforce.

The Employment Taskforce exhorts Member States to act decisively now, so as to increase confidence and support economic growth. Beyond the need to create more jobs in the short-term, it underlines that employment policies must raise both employment and productivity levels - the key drivers of Europe's economic growth potential and vital components of the Lisbon strategy.

The Employment Taskforce identified four key requirements to boost employment and productivity:

- increasing adaptability of workers and enterprises,

- attracting more people to the labour market,

- investing more and more effectively in human capital,

- ensuring effective implementation of reforms through better governance.

The Employment Taskforce identified priorities for action of general relevance for Member States under each of these headings. It also addresses specific messages on the reforms needed to each of the fifteen current and the ten new Member States.

The new strategy has also been designed to support employment and labour market reforms in the ten new Member States due to join the EU in 2004. Faced with major restructuring at political, economic and institutional level, the new Member States have embarked on major labour market reforms over the last decade to adjust to a market economy and prepare for membership. Through a close partnership with the European Commission, they have produced Joint Assessments of their respective employment and labour market challenges and a regular process of reporting [3]. They will take their full part in the co-ordinated European Employment Strategy as of 1st May 2004.

[3] "Progress in implementing the Joint Assessment Papers on Employment Policies in acceding countries" COM(2003) 663.

2. OVERALL ASSESSMENT WITH REGARD TO THE EU EMPLOYMENT OBJECTIVES

The 2003 National Action Plans prepared in response to the new Guidelines present an employment policy approach which is overall rather balanced across the three EES overarching objectives, although in a number of cases the quality-productivity and/or the inclusion objectives are not presented on an equal footing with the objective of full employment. [4] Progress across these objectives is reviewed below.

[4] Quality is not explicitly discussed in the 2003 National Action Plans for DE (only as "accompanying measures"), IT, NL, and UK. Social inclusion is not explicitly discussed in the case of DE, AT and IT. This does however not prejudge the substantive content of the National Action Plans concerned in regard of these objectives.

2.1 FULL EMPLOYMENT: THE EU IS AT RISK OF FALLING SHORT OF THE EMPLOYMENT RATE TARGETS

Progress towards the Lisbon target of a 70% overall employment rate for the EU has come to a standstill, and it is now clear that the EU will miss the intermediate employment rate target for 2005 (67% agreed in Stockholm). The overall employment rate is stagnating in 2003 at the level reached in 2002 (64.3%). Even with economic recovery the employment rate may only reach 65 % in 2005. Some catching up has occurred in some Member States with very low employment rates (EL, ES, and IT), where employment growth continued in 2002 and 2003. Still, only four Member States reach the 70% target (DK, NL, SE and UK), whereas FI, PT and AT are close.

The protracted slowdown implies flat or very moderate employment growth for three years (2002-2004) and no or little improvement in the employment rate in this period. Therefore, as illustrated by the graph below, the EU will miss the intermediate employment targets in 2005 and a substantial acceleration of employment growth is needed in the coming years. To reach the Lisbon target of 70%, employment would need to grow on average from 2004 - 2010 by 1.6% - a break in trend from the present performance but not out of reach if compared to the performance in the 1997 - 2000 period. This would imply an increase in employment by some 15 million jobs for the EU-15. This figure would need to be close to 22 million jobs if the target was fixed for the EU25.

>REFERENCE TO A GRAPHIC>

Source: Commission services. European Labour Force Survey until 2003. For 2003-2005 employment rate updated using DG ECFIN employment forecast and Eurostat Population projections. From 2005 employment rate extrapolated assuming a constant yearly increase.

The aggregate picture hides diverging trends in employment rates by gender. The employment rate for women continued to improve in 2002, and remains, at 55.6%, on track towards the intermediate target of 57% for 2005. It exceeds the 60% EU target set for 2010 in seven Member States (DK, NL, AT, PT, FI, SE and UK). The EU average is clearly determined by the low employment rates for women in only four Member States (BE, EL, ES, and IT). To reach the 60% target, the average annual increase in the female employment rate experienced since 1997 must be maintained over the next seven years. This cannot rely on economic growth alone; the pace of reform must also be maintained.

Progress towards the Lisbon target will critically depend upon the trend in employment of older workers. Although employment rates for older workers increased more substantially to just over 40% in 2002, the target of 50 % is a considerable way off. The 50% target has only been reached by four Member States (DK, PT, SE, and UK) and is within reach in a further two (FI and IE). Progress towards the target will essentially depend on the remaining Member States (in particular BE, FR, IT LU and AT), where the employment rate of older workers is less than 33%. Urgent action is therefore required to increase the numbers of older workers in work, but also to ensure that tomorrow's older workers - the 40 to 50 age group - can remain in the labour market longer. For the EU 50% target to be reached 7 million more people in the 55-64 age bracket will need to be in work in 2010 for the EU 15.

Member States have undertaken a range of reforms to stimulate participation and labour supply, such as policies to make work pay, active labour market policies, education and training and mobility. However, reforms to improve the environment for job creation are less comprehensive. Approaches sometimes focus on job creation by reducing labour costs (BE, FR, AT); through deregulation (DE, FR, IT); by encouraging SME development and innovation (EL, IE, NL, AT, FI, SE, UK); through regional development (PT, IE) or just rely on the interaction between economic growth and flexible labour markets (DK, ES, IT). The opportunities of the knowledge-based economy for job creation do not feature prominently in the policy package.

In their response to the 2003 Employment Guidelines, Member States have displayed a wider commitment by setting of national targets; either in the form of employment rate targets or an objective of employment creation during the government term of office (see Table in Annex 2). Some of them (notably BE, FR, EL, AT and FI) reflect more ambition than in the past. However, setting of targets needs to be backed up by rigorous implementation of reforms.

2.2 QUALITY AND PRODUCTIVITY AT WORK: MIXED PROGRESS ACROSS THE VARIOUS DIMENSIONS

The positive interactions between quality in work, productivity, employment and social inclusion have been underlined in the Commission report prepared at the request of the Brussels Spring European Council [5]. This report contains a full review of progress towards quality in work, following the multi-dimensional approach defined in the Employment Guidelines.

[5] See Communication COM(2003) 728 of 16.11.2003 "Improving Quality in work - a recent review of progress"

The decline in labour productivity growth over the last decade is particularly worrying for the EU. Labour productivity growth has further slowed over recent years, contrasting with the rise in employment. Compared with the first half of the 1990s the period 1996 to 2002 has witnessed a significant increase in the contribution of employment growth to GDP growth. By comparison, up until the recent downturn, the US has been able to combine a strong employment performance with acceleration in labour productivity, resulting in GDP growth 1 percentage point higher in the US than in the EU over period 1996-2002. It is worth mentioning that some smaller EU Member States have performed well above the EU average and even above that of the US.

In the short term actual labour productivity growth may deviate from the longer term path, in particular in a period of economic slowdown when lower productivity growth may partially result from adjustment in hours rather than in number of people. Also, although labour market reforms encouraging a more labour intensive growth pattern may lead to actual productivity growth below the longer term potential this should not be regarded as a trade-off. A higher employment rate implies an unambiguous increase in GDP per capita with no negative implications for the long-run productivity growth of the existing work force.

There is, therefore a need for acting simultaneously on employment growth and to increase efforts to improve long-term productivity growth where recent trends are clearly less than encouraging. Key to this is the existence of a well-educated, skilled and adaptable workforce and the EU must invest more, and more cost-effectively, in its human capital, within the framework of a sound budgetary policy. The EU also needs to speed up the diffusion of ICT in particular in the services sector and to increase investment in R&D and infrastructure, act on improving the entrepreneurial culture and speed up reforms of goods and services markets. As some of the sectors which created a high number of jobs showed a rather dismal productivity growth performance efforts to increase quality in work including upgrading of skills and more adequate work organisation in these sectors should also contribute to meet the productivity challenge [6].

[6] For a more detail analysis of Productivity trends and performance please see Chapter 2 of "Employment in Europe 2003" and the Annual Economic Review 2003.

Productivity is predominantly considered within the NAPs as an objective in its own right, independently from the link with quality. It is also to be noted that most countries with a high employment rate (UK, NL, SE and FI) see productivity increases as a means to compensate for expected labour supply tightness in the medium term. In most Member States, there is thus ample scope for a more comprehensive approach, recognising the positive interactions between quality in work, productivity and employment growth and social inclusion.

Recent trends and performances around the various dimensions of quality are encouraging in some respects. Consistent improvements can be seen in the EU in terms of education and skills, in terms of gender gaps (except the pay gap), and for safety at the workplace. However, there is scope for considerable improvement under each dimension of quality. The employment rate of older workers, while slowly increasing, is still far from the Stockholm target of 50%. Young people face increasing difficulties in several Member States to find jobs with reasonable career prospects. Non EU-nationals are at a clear disadvantage in terms of employment and unemployment, and the integration of disabled persons in the labour market remains problematic, especially for people with severe disabilities. As regards gender equality, the lack of adequate facilities for childcare and care for other dependants is a constraint to higher women participation; gender pay gaps have shown little tendency to decline, and sectoral and occupational gender segregation remain. Last but not least, as indicated above, the trend in productivity growth is disappointing.

Only few Member States attempt to address each individual dimension of quality in a comprehensive approach. Rather, there is identification in each Member State of its own specific critical dimensions as a priority for action. For example, the balance between flexibility and security and gender equality are highlighted as key issues in IT, ES, EL and PT. Training is highlighted in PT and ES, as well as in Member States with high productivity (DK, FR, FI, SE). Health and safety emerges as an important priority in many countries, with five (DK, EL, FR, PT and the UK) having set targets for the reduction of accidents. Also working time, which is only indirectly covered by the ten dimensions, is mentioned as an issue (BE, LU, FI).

2.3 SOCIAL COHESION AND INCLUSION: INCREASING ATTENTION GIVEN TO INCLUSIVE LABOUR MARKETS

In addition to the registered unemployed, in 2002, 4.5% of the EU working age population (a slight increase compared to 2001) was inactive but wanting to work. Recent increases in unemployment are worrying as they might pre-curse an increase in long term unemployment, which is a major risk of social exclusion. This would also make it increasingly difficult for people at a disadvantage to access the labour market. In this context, the already precarious labour market position of people with disabilities, migrants and ethnic minorities, single parents, early school leavers and older workers may be even more difficult (see GL 7).

Following the presentation of National Action Plans on inclusion [7] which present national approaches for combating poverty and social exclusion across various policy fields, Member States' Action Plans on employment try to set out in more detail the contribution of employment policies to social inclusion. However, there is still considerable scope for improvement in the extent to which the majority of Member States addressed the objectives laid down in the third overarching guideline on social inclusion.

[7] Joint Inclusion Report 2003

There is a common thread in the employment plans in considering that participation in employment plays a very important role in fostering social inclusion. However, there are differences in emphasis as to the extent to which labour market policy can be considered as largely sufficient to tackle the problem of social exclusion. Some Member States (Netherlands, Finland) tend to focus on the removal of obstacles to participation in employment. This 'making work pay' approach favours across the board social security and taxation reforms (tax credits for low income earners, removal of disincentives to work, in combination with support measures such as childcare provision). Other Member States (France, Portugal, Sweden, Austria, Greece), while recognizing the key role of employment policy in the fight against social exclusion, tend to focus more on the difficult situation of specific groups and favour tailor-made measures taking into account the individual needs of the persons concerned. Member States [8] also explicitly recognise the limits of employment policies and stress the need for increased synergy with policies in other fields such as education, healthcare or housing, within a truly multidimensional approach.

[8] For example DK uses the concept of "negative social inheritance", and EL recognises factors like family composition and education.

Member States had been invited by the Barcelona European Council to set national targets for the reduction of poverty by 2010. Most used the opportunity provided by the NAPs/inclusion and the NAPs/employment to set such targets. Relevant examples include EL (bringing down by 2010 the percentage of people at risk of poverty to the EU 15 average), NL (target to increase the employment rate amongst ethnic minorities to 54% by 2005), SE (to halve the number of persons in need of social assistance between 1999 and 2004), FR (to increase the outflow from unemployment of social minima recipients during the period 2003-2005. The UK aims to increase to 70% the proportion of lone parents in work, to reduce the proportion of children in workless households and to increase the employment rate of disadvantaged areas and groups.

The focus on regional disparities is less prominent (with the exception of PT, EL, BE and UK), although regional differences in labour market performance remain considerable. The disparities in labour market participation, between regions, especially as concerns unemployment, and the high levels of inequalities between the different social groups, result in pockets of deprivation and social exclusion even in the wealthier regions of the EU. Addressing these imbalances requires a balanced mix of productive and human capital investment, and labour market reforms such as wage setting that take account of regional and local conditions.

In order to meet the Lisbon objectives, a trend break will be needed over the coming years. Both employment growth and labour productivity growth must accelerate strongly. Recent labour market reforms have demonstrated their worth by increasing the resilience of employment to the economic downturn. Stronger support to entrepreneurship, research and the diffusion of innovation, and increased and more effective investment in human capital are all equally important to bring about this change. Such reforms need to be pursued forcefully together with reforms in product, services and capital markets.

Member States should confirm their commitment to such reforms by setting national employment rate targets as proposed by the Employment Taskforce, and building up synergies between employment, quality and productivity and social inclusion policies in pursuing reforms. By implementing the ten specific guidelines Member States will contribute to the promotion of adaptability of workers and enterprises, foster labour supply and improve levels of human capital that have been identified by the Taskforce as key conditions for success.

3. IMPLEMENTATION OF SPECIFIC GUIDELINES: ASSESSMENT OF PERFORMANCES AND POLICIES

3.1 ACTIVE AND PREVENTATIVE MEASURES FOR THE UNEMPLOYED AND INACTIVE

Key facts and challenges

The economic slowdown has stopped the long-term fall in the EU unemployment rate. The unemployment rate has risen from 7.4% in 2001 to 8.1% in 2003, and some 14 million people are currently unemployed in the EU 15 as a whole. Long-term unemployment stabilised at over 3% (more than 5% in EL and IT). Long-term unemployment affects relatively more women than men (with average rates of 3.6% against 2.6%), except in FI, IE, SE and the UK. Youth unemployment increased in the first half of 2003 and very high levels continue to be registered in EL, IT, ES, FI, FR and BE [9].

[9] In the first half 2003, the youth unemployment ratio stood at 7.5%, (and exceeded 9% in EL, SP, IT and FI). Youth unemployment rate reached 15.7% (with figures of more than 20% in the same countries).

Although the overall unemployment rate is expected to stabilise over the next two years, there is a continuing risk of a surge in long-term unemployment and inactivity. This calls for a strengthened emphasis on activation and prevention policies in order to limit the unemployment spell, and prevent inflow into long term unemployment, detachment from the labour market and inactivity.

Policy response

The specific guideline was revised in 2003, built around a clear sequence of steps to be taken from the early stage of unemployment through to long-term unemployment. As a consequence of the change, the corresponding indicators were revised and a clear evaluation of compliance in 2002/03 would be premature. Annex 1 and 2 provide the indicators available so far under the new approach.

Nevertheless, Member States have made further progress in ensuring that every unemployed person benefits from individual job search and guidance services at an early stage of their unemployment spell. This is the case notably in DK (new "intensive contact programme"); in BE (early screening in Flemish part); in FR (nearly all job-seekers benefit from the PAP) - ND [10] within 4 months); in DE (earlier registration and intervention by PES as result of the Hartz reforms); and in IT where, in the process of the labour market reform, the PES will have to offer orientation interviews within 3 months of the unemployment spell.

[10] Plan d' Action Personnalisé - Nouveau Départ

Efforts are also continuing to ensure a new start, in the form of training, retraining, work practice, a job, or other employability measure to each unemployed person before reaching six or twelve months unemployment respectively for young people and adults. Major reforms to be highlighted include the Jump-Plus programme in DE, the revision in BE of the first-job agreements system to facilitate recruitment from enterprises, and the "High Unemployment Area Programme" in IE aiming at identifying and breaking down the barriers to employment. The indicators provided by Member States, although disparate [11], point to an increased coverage of the unemployed by such measures. Eight Member States (BE, DE, FR, IE, LU, FI, SE and UK) attain or exceed the new 25% target on activation for the long-term unemployed. However, there is still only little attention given to the inclusion of inactive persons, hindering in particular women's access to active and preventative measures. A particular effort should be made by Member States to provide comparable activation and prevention indicators to allow for an assessment of progress over the coming years.

[11] Several member States have not been able to report the indicators on the basis of the revised definitions

Modernisation of employment services to support activation and prevention is in progress, and in some Member States there is a move towards increased collaboration between public employment services and private sector partners, in particular temporary work agencies (NL, IT, DE, UK). Steps have been taken to improve services to employers, through the development of call centres and the direct input of jobs over the Internet (UK, IE, DE, BE and SE). Services are being strengthened at the regional (FR, ES, IT) and local level (DK, NL). New ICT systems are being developed within the PES in most countries. Further efforts to continue the modernisation process are desirable.

Seven Member States (AT, DK, ES, LU, FI, SE and UK) provide data on effectiveness of activation measures in terms of integration into a job after an active measure. In AT, almost half of unemployed people find a job six months after participating in a measure, compared with roughly one third in SE and SP, and more than two thirds in LU. Several Member States implement tailored made measures in favour of the young (BE, DE, FR, EL, IT) and women (EL, ES, IT), often in combination with hiring incentives for employers. Several (DK, FR, NL, FI and SE) have taken significant measures to improve unemployment benefit management, through co-operation between labour market institutions. Conditionality of benefit receipt linked to participation in the activation process is a clear example of this co-operation.

Notwithstanding budgetary constraints, there remains considerable scope for further redirecting of spending and greater efficiency through a better timing and focusing of measures.

In this context, the Employment Taskforce has underlined that measures aimed at preventing unemployment and supporting (re-)integration of the newly unemployed and inactive people into employment are essential to tap the potential of the workforce, and that there are even more crucial in a period of economic downturn and for regions and sectors experiencing restructuring. The Taskforce urged Member States to:

- Offer personalised services to all unemployed jobseekers at an early stage, in the form of guidance, training or new job opportunities, in line with the Employment Guidelines;

- To improve the efficiency of activation programmes by identifying real needs of job seekers and giving preference to tailor-made measures over general large-scale programmes;

- Develop rapid response schemes in the even of plant closures or large scale company restructuring;

- Equip employment services with sufficient capacity (in terms of staff and resources) to deliver such tailor-made services, and strengthen local employment partnerships;

- Address the specific needs of the most vulnerable, including disadvantaged younger people and people with disabilities.

3.2 JOB CREATION AND ENTREPRENEURSHIP

Key facts and challenges

In the enlarged European Union some 22 million jobs need to be created in order to reach the Lisbon employment rate target in 2010. EU employment growth was only 0.4% in 2002, equivalent to a net job creation of 0.6 million. During 2003, employment growth is expected to be particularly weak in DK, DE, NL and PT. The birth rate of new enterprises remained stable in 1997-2000. DK, LU, ES and the UK had the highest birth rates of business of those Member States providing comparable data. The survival rate of new enterprises was highest in LU and the UK. Business investment as a percentage of GDP in the EU declined from 18.3% to 17.2% from 2000 to 2002.

More must be done to tap the job creation potential in the EU through an improved business environment and by fostering business capacity to innovate. Increasing job opportunities through entrepreneurship and the creation of new enterprises is essential to reach the Lisbon employment rate targets. Stimulating innovation and spreading its results more effectively across the economy is also essential to raise employment and economic growth.

Policy response

Most Member States have made progress in facilitating start-ups and lowering administrative burdens, especially when combined with e-Government initiatives aiming at simplifying the registration of companies and reducing ongoing compliance costs. A few Member States have set targets for the creation of new enterprises (FR and BE), and further targets are announced by Member States in context of the enterprise Quantitative Target Project. The transfer of business has received increased attention in FR and NL, and measures to ease the tax burden of generational change of ownership are taken by EL, FI and SE. Expanding Business support services is a priority in most Member States, but only a few take measures to further address the quality of these services (ES, FI, DK, PT). Few Member States report on specific measures designed to ease the administrative burden to the hiring of staff, but systems for the registration of employment of new workers have developed (BE, ES, FR and EL).

The simplification of existing regulation continues in the Member States, and efforts have increased regarding the impact assessment of new legislation and in tackling conflicting regulations. Several Member States have set up inter-ministerial working groups or task forces on the simplification and improvement of regulation. In the UK the revised guide on regulatory impact assessment requires departments to carry out small business impact tests on new regulations, which are to be followed up by clear responsibility for regulatory reform in each Government Department. A number of Member States are looking into simplification of bankruptcy laws, including DK, EL, PT FI, and BE. Several Member States have introduced new or strengthened existing measures for access to funding for start-ups, and existing SMEs, but it remains a major constraint for the development of businesses, in particular for new and small firms [12]. Business angel networks, which can offer management assistance and board membership in addition to access to finance, are being further promoted in FR and BE.

[12] For further analysis, see the 2004 Report on the implementation of the European Charter for Small Enterprises where "access to finance" is one of the priority areas.

To achieve the aim of making entrepreneurship a career option for all, Member States provide a range of training measures and targeted action towards groups underrepresented as entrepreneurs. Female entrepreneurship is mainly promoted through training and the creation of networks (UK, LU, ES, and EL). DK put emphasis on flexible services to accommodate individual needs. The opening of closed professions in EL and the lifting of requirements of obligatory grades within certain trades in DE and AT may increase the opportunities for setting up businesses. Some Member States provide particular support for start-ups in the social economy. To reduce the risk of transition to self-employment, AT plans to extend the eligibility criteria for unemployment benefits. The impact of social protection systems on incentives to take up a self-employed status and to move between the employed and self-employed status should be reviewed. In the context of an ageing population of business owners, provisions and support need to be further developed in order to ensure a successful transfer of businesses. Most Member States recognise the importance of fostering entrepreneurship through education and training and some include this aspect explicitly in the curricula at various levels of education (but little specification on the modules is given). Improving the teaching methods of teachers and career counsellors is important to raise the quality of the education and is outlined as a priority in FI. In some countries, links between businesses and education establishments are fostered for entrepreneurial training (AT, IE, LU, UK), for training activities to upgrade managerial skills or to further the innovative capacity of businesses.

In this context the Employment Taskforce has underlined the need for Member States to:

- Reduce administrative and regulatory obstacles to the setting up and subsequent management of new business, for instance by developing advisory services (such as one-stop shops) for business start-ups and providing help for SME's in managing human resources;

- Improve access to finance for start-ups and SME's;

- Promote an entrepreneurial culture, particularly by increasing managerial training in tertiary and vocational education and reviewing insolvency law with the aim of reducing excessive risks to entrepreneurs;

- Reduce the level of non-wage labour costs for the low skilled and those on low wages, as well as ensure employment-friendly wage developments that reflect the labour market situation and overall levels of productivity, and allow sufficient wage differentiation across sectors and regions;

- Encourage networks and partnerships for the promotion and the dissemination of innovation at regional and sectoral level, and spread the use of ICT by making it more accessible and increasing training at all levels;

- Ensure proper incentives both fiscally and through intellectual property rights to encourage increased levels of private investment in research and innovation and exploit the potential of the Single Market through common standards, cross-country cooperation and mobility of researchers;

- Review insolvency law with the aim of reducing excessive risks to entrepreneurs and removing the stigma of failure.

3.3 ADDRESS CHANGE AND PROMOTE ADAPTABILITY AND MOBILITY IN THE LABOUR MARKET

Key facts and challenges

Recent years have seen increases in fixed-term and part-time employment, although this process has come to a standstill in 2002. There is now an observed trend towards convergencewith Member States in which part-time and fixed-term work is under-represented showing significant increases (except EL and IE). There is also a n increasing diversity of working time patterns in most countries. There is a medium term trend of a decline number of work accidents, with substantial improvements in EL, IE, PT and BE. Geographical mobility between regions remains rather low. In 2002, it was either unchanged or indeed decreased in Member States.

European countries are experiencing a period of intensive economic change and company restructuring. Behind the marginal growth in employment in 2002 and stagnation in 2003, an important number of jobs have been created and shed [13]. Member States, workers and enterprises need to increase their capacity to anticipate, trigger, and absorb change. Better responsiveness to change requires a high degree of flexibility in labour markets and a diversity of contractual and working arrangements. This can only succeed if combined with adequate security for workers in terms of their capacity to remain and progress in the labour market. Geographical and occupational mobility needs to be increased to facilitate an adaptable labour market.

[13] See Employment in Europe 2003, quoting layoff announcements in the order of half a million, notably in the ICT and financial sector.

Policy response

Recent labour market reforms have started to allow greater possibility for enterprises to use a variety of different employment contracts. There is an observed trend towards more flexibility through working time patterns and the working environment. For example, one can see in the majority of Member States, extended reference periods for working time accounts or new options for career breaks created to better balance work and private life. Some Member States, are beginning to focus on introducing more flexibility into "standard" contracts. For instance, as regards the definition of the thresholds beyond which stricter employment protection is applicable (DE), or legislation on dismissals which set out a more transparent and reliable framework for both employers and employees (ES, PT). Some Member States have launched comprehensive reviews of employment related legislation (NL, PT, FR).

Efforts to foster adaptability through vocational and continuing training tend to be better developed in cases where social partners have concluded relevant agreements. Differences of training provision between those who are covered and those who fall outside collective agreements are particularly marked in BE, DE, ES, FR, IT, LU and PT.

The improvement of working conditions, and the reduction of accidents at work and occupational diseases are important priorities for almost all Member States, with five setting targets for the reduction of accidents (UK, DK, FR, EL, PT). The focus is on prevention through better information and counselling, and stricter monitoring. Member States devote more attention to economic change and restructuring. Professional re-orientation, underpinned by training, targeted counselling, and outplacement services are seen by most as the appropriate approach. The implementation of such a policy requires a better co-operation and co-ordination of all actors, improved monitoring and better early warning systems. Actions to promote geographical mobility tend to be placed in the context of reducing regional disparities, since, in the short-run, labour shortages are not a concern in the majority of the Member States. Policies aim to facilitate mobility and transport, often through financial incentives (ES); where relevant they address skill aspects (knowledge of foreign languages and validation of competencies in the case of trans-national mobility).

Most Member States engage with EURES to provide additional service to the supply and demand sides of the labour market. While many Member States refer to the imperative that all PES jobs should be available on a common European Platform by 2005, only a few indicate a specific ambition to do so (DE, SW, PT, DK).

In promoting increased labour market flexibility combined with security, Member States must take into account the broad spectrum of measures that impact on the capacity of workers and enterprises to adapt. Access of workers to continuing training (especially for the low skilled and older workers) is particularly important. More should be done to increase levels of participation by creating incentives for employers and individuals. The social partners should ensure effective implementation of agreements in this area.

Building on the interaction between flexibility and security, the modernisation of work organisation is key, both to increasing employment, and to boosting productivity. Whereas greater flexibility may be needed in some Member States as regard standard contracts [14] a review of the contractual framework may also require strengthening security in non-standard contracts. The adoption of an EU framework directive on working conditions for temporary agency workers would boost the opportunities offered by the temporary agency sector to reconcile flexibility and security. More attention should be given to the management of restructuring notably in the light of enlargement. This should aim at a preventive approach, minimising the potential risks of restructuring for employees, enterprises and the local communities.

[14] Standard contracts are defined as contracts of unlimited duration, whether full or part-time.

In this context, the Employment Taskforce has underlined the need for Member States and Social Partners to:

- Examine, and where necessary, adjust the level of flexibility provided under standard contracts, to ensure their attractiveness for employers and workers;

- Review the role of other forms of contracts with a view to providing more options for employers and employees depending on their needs;

- Ensure there is adequate security for workers under all forms of contracts and prevent the emergence of two tier labour markets;

- Remove obstacles to the setting up and development of temporary work agencies as effective and attractive intermediaries in the labour market, offering improved job opportunities and high employment standards;

- Promote the use of ICT and working time flexibility as tools to modernise work organisation;

- Remove obstacles to, and raise the attractiveness of part-time work for employers and workers;

- Adapt social protection systems to support labour market mobility and facilitate transitions between different status, such as work, training, career breaks or self employment (job-to-job insurance).

3.4 PROMOTE THE DEVELOPMENT OF HUMAN CAPITAL AND LIFELONG LEARNING

Key facts and challenges

The EU faces considerable difficulty in reaching the 2010 target of 85% of 22 year-olds completing upper secondary education. In 2002, 75.5% of 20-24 year olds [15] had completed upper secondary level education, a slight increase from 2001 (75.2%). There are wide disparities between Member States with rates ranging from 43.7% in PT to 91% in UK. Women in general have higher attainment levels than men. Participation in education and training [16] continues to be low, at only 8.5% of the 25-64 year old population (8.4% in 2001). If this rate of progress continues, the EU will not meet the 2010 target of a participation rate of 12.5%. Participation rates are low in several Member States, below 4% in EL, FR and PT and below 6% in ES, IT, IE, and DE. The highest adult participation levels are found in the UK and SE with rates of over 21%. Participation also varies widely by age group and attainment level. Groups most in need are the least likely to receive training. Those aged between 25 and 34 are nearly five times more likely to take part in education and training than those aged between 55 and 64 are. And the low skilled are 4 times less likely to participate in training than the high skilled - reinforcing the skills divide. Women are slightly more prone to participate in training than men are.

[15] Due to the sensitivity of data for 22 year olds the agreed indicator as a proxy to measure this target is the educational attainment levels of 20-24 year olds

[16] Source: Labour Force Survey. For most Member States, LFS participation refers to education and training in the four weeks preceding the survey.

For the EU to reach the targets for 2010 demands an impetus in policy reform to ensure lifelong learning opportunities for all. In particular the key challenges are to enhance levels of basic skills by giving everyone the right to secondary education, to reduce the number of people leaving school early, and to increase access to training throughout the life-cycle. Furthermore, Member States together with the social partners need to make transparent the rights and obligations in terms of education and training, to define and control quality standards of education and training and ensure that there is a sufficient level of investment by employers. It is crucial that, especially given the current economic climate, investment in human capital by employers is not allowed to spiral downwards, but instead should increase.

Policy response

Several Member States have pursued considerable efforts to cover different aspects of Lifelong learning, mainly relating to employability, but few outline a coherent and comprehensive lifelong learning system or strategy. Recent reforms in DK, SE, FI, FR aim to make existing systems more flexible and adapted to individual needs. BE, DE, AU and FI prioritise the improvement in the transition for school to work. In IT, vocational training systems have seen widespread reform through a new apprenticeship system, the creation of Fondi interprofessionali, and the creation of individual training leaves. Further examples point to specific areas of reform, namely combating illiteracy (BE, FR, IE, and the UK), improving basic skills (DK, DE, IE, PT, UK), and ICT skills (DK, DE, IE, the NL, EL).

Reforms in several Member States aim to deliver a more demand-led system through mechanisms to better anticipate skill needs. IE has set up of an expert group on "Future Skill Needs" and the Skills Strategy for England aims to make training provision more closely related to employer needs. Most Member States report on national progress towards the EU wide targets for 2010. Several Member States set national targets that correspond to the EU targets (IE, PT, FR, SE and DK). Others set targets on other aspects of lifelong learning (BE, UK, ES). It is particularly important that Member States who lag well behind set ambitious targets to drive policy.

A few Member States illustrate a commitment to deliver increased and more efficient investment in human capital. However, there is little information on levels of investment or ways of encouraging the more efficient investment of these resources. A few targets have been set for increasing investment in human capital, but there is little detail on strategies to increase private investment - from the individual or firm. Member States have developed a reasonably wide range of policies in this field but with there is less illustration of a commitment to bringing about the increase called for in the guideline. Several types of policies exist to encourage employers, and in particular SME's to invest in their workforce. Approaches include reducing social security contributions for employers who train (ES), tax credits to firms which invest, aid for employers to meet the costs of giving staff paid time off, contractual agreements on training, and compulsory levies.

Social partners are increasingly involved in the design and delivery of adult education and training policies, with increasing evidence of collective or contractual agreements covering training. Efforts to encourage individuals to participate and invest in learning have been reinforced in a variety of ways. Some Member States have experimented with broadening lifelong learning participation through financial incentives, for example time accounts or individual learning accounts, and payments to compensate for time away from work. However, policies tend to be quite general, and Member States have yet to develop a range of policies that will attract all individuals - from the high to low skilled - to take more responsibility for learning. Many initiatives also target the recognition and certification of non-formal or workplace learning to better recognise existing skills, and cut down the length of time needed in training. The important role of ESF in investing in Human Capital could be better reflected.

In this context, the Employment Taskforce has highlighted the importance for Member States to increase investment in human capital. The Taskforce urges Member States and Social Partners to:

Raise levels of Human Capital:

- Give everyone a right of access to secondary education and a minimum level of basic skills;

- Promote access by a larger share of young people to university;

- Increase access to training throughout the life-cycle, with particular attention for the low-skilled and other disadvantaged people;

- Better anticipate future skills' needs, including through a European network of forecasting agencies;

- Member states must set themselves transparent and ambitious targets, to complement those set at European level, for establishing effective lifelong learning systems.

Share costs and responsibilities:

- Make transparent the rights and obligations in terms of education and training for each party;

- Define and control standards to ensure quality of education and training systems, whether provided by public authorities, companies or training specialists;

- Guarantee a sufficient level of investment by employers as well as a fair shainrg of costs and benefits between them, through a combination of compulsory and voluntary schemes, such as sectoral or regional training funds, and through other measures such as tax credits and support services.

Facilitate access to lifelong learning:

- Improve the identification of individual needs and access to training. This could be achieved by making training a central element of contractual relationships, improving advice and guidance in creating personal development plans and enhancing the recognition and validation of competences and qualifications;

- Broaden the supply of training by better exploiting new tools that are available such as e-learning;

- Promote networking and partnerships between actors at all levels to foster co-operation and sharing of good practice.

3.5 INCREASE LABOUR SUPPLY AND PROMOTE ACTIVE AGEING

Key facts and challenges

The continued increase in women's labour participation in most Member States has partially offset the declining or stagnating participation rate for men. The female activity rate continued to increase, although at a slower pace, to 60.9 % in 2002 (the male activity rate slightly increased to 78.4%). Participation rates for young people (15-24) have been stable or falling in most Member States since 1997, and employment rates continue to be low, slightly reduced in 2002 to 40.6% [17]. The employment rate of older people increased significantly in some Member States (FR, FI, NL) and at EU level reached 40.1% in 2002, with a significant difference between women and men (30.5% and 50.1%). However, in four Member States (LU, AT, BE, IT) the rate is still below 30%.

[17] Part of this trend is a result of increased participation

The ageing of Europe's population will gradually lead to a contraction in the labour force. By 2030 the population of working age could be reduced to 280 million for the EU25 (compared with the current 303 million) implying a significant decline in the volume of employment, even if the 70% target is reached in 2010. This has implications for growth potential and for the sustainability of pensions and benefits. Several Member States are confronted with the challenge of a growing number of incapacity or sickness benefit claimants (UK, NL, SE, LU, DK) which create serious inactivity traps, mainly occurring at age above 50.

Considering that the Barcelona Spring Council in 2001 called for an increase by five years of the EU average exit age from the labour market by 2010, withdrawal from the labour market continues to take place at relatively early ages in several Member States, although the average exit age has increased from 60.5 [18] in 2001 to 61 years in 2002. Without urgent and drastic measures to reverse current trends, there is no chance of getting near, let alone reaching, the European targets for increasing the employment rate of older workers and raising average exit ages from the labour market. The challenge is not only to ensure that a higher share of those currently aged 55-64 stay in work; but also to enhance the employability of those currently in their 40s and 50s.

[18] This figure was revised upwards from the original estimate presented in the Employment Guidelines. Figures for 2001 and 2002 remain provisional

Policy response

Member States are progressing in developing comprehensive strategies to increase labour participation. A few are focusing on all relevant groups, young people, women, older workers and immigrants (SE, DK, FI, UK). Policy efforts in most Member States are now better articulated and recent trends on employment rates for both older workers and women are encouraging. Few Member States report on measures promoting youth participation in both education and the labour market (SE, DK, FI, AT), although most Member States are promoting activation for young people under specific guideline 1. Raising female participation is a critical part of the ageing challenge, and Member States can not rely on cohort effects alone to meet the targets. Measures focus on childcare and other care facilities (see section 3.6 below).

Economic restructuring, voluntary early retirement schemes and existing disincentives within statutory retirement schemes are still hampering the employment rates of older workers from picking up significantly. A growing number of Member States are implementing national ageing strategies (SE, UK, DK, FI) and some have set national targets to raise the average exit age (FR, FI, PT). Member States apply a range of measures focusing on benefit reforms and more attention is given to improving the working capacity through better access to training and adaptation to working conditions. A strong focus is placed on pension reform, including increases in standard retirement age and discouraging early retirement whilst favouring flexible retirement.

Immigration is considered by most Member States as an important source of additional labour supply, but only for professions or sectors encountering recruitment difficulties. Several (BE, DE, ES, IE) aim to simplify the system of work permits and regulations for recruiting immigrants and facilitate immigration from the Accession countries (IE, AT, UK). Most give increased attention on integration policies for migrants currently living in the EU (GL 7) or on alleviating labour shortages and bottlenecks.

Despite progress, employment rates of older workers and women have to improve more rapidly if the agreed EU targets on employment and exit age are to be met. The ageing challenge affects all generations and cannot be tackled successfully in a piecemeal fashion. A significant change in economic incentives, especially more targeted tax-benefits structures, adequate and affordable childcare facilities and making part-time work financially more attractive to both women and men are essential to stimulate female participation. There is a need for stronger and more decisive commitments by social partners on labour supply management, especially regarding gender, age and immigration aspects, and on devising and disseminating best practices in both the public and private sector. Enterprises, respecting their corporate social responsibility, need to recognise the benefits of an age diverse workforce and make adjustments to their employment practices to retain experienced workers longer.

The development of a more active and co-ordinated immigration policy at EU level is necessary as part of a global approach to increasing labour supply.

In this context, the Employment Taskforce has underlined the need for Member States and Social Partners to define a comprehensive active ageing strategy for workers to retire later and for employers to hire and keep older workers. This includes:

- Providing incentives for workers to retire later and for employers to hire and keep older workers. This includes adjusting tax-benefit mechanisms, employment and pension rules to enhance incentives for older workers to stay longer in employment and to discourage early exits from the labour market. Efforts to discourage early retirement should be pursued in all member States;

- Promoting access to training for all regardless of age and developing lifelong learning strategies, in particular workplace training for older workers, who are under-represented in training;

- Improving the quality of work to provide an attractive, safe and adaptable work environment throughout working life, including the provision of part-time work and career breaks.

3.6 GENDER EQUALITY

Key facts and challenges

The potential of female participation is still largely untapped. In the EU 15, 6.4 million women of working age are not in paid employment, yet would like to work, and 6.6 million are unemployed. In 2002 the employment rate of women increased slightly from 55% to 55.6%, reducing the employment gender gap to 17.2 percentage points. The unemployment gender gap decreased to 1.8%. The highest gaps (above 20% in employment and 5% in unemployment) are in ES, EL and IT. The gender pay gap has remained high since 1998 at 16%, with a substantially higher gap in the private sector (21 %) than in the public sector (12%). The highest overall gaps (above 20%) are in DE, the UK and the NL. Eight Member States have pay gaps above 20 pp in the private sector (PT, UK, NL, AT, DE, IE, ES, EL). Working arrangements are an important dimension as well. Almost one third of employed women work part-time, compared to less than 5% of employed men. One third of women working part-time do so because of care of children or other dependants. In view of the impact of parenthood on employment for women the issue of childcare is of particular importance.

Gender gaps in the labour market should be progressively eliminated, if the European Union is to deliver full employment, increase quality at work and promote social inclusion and cohesion. This requires both a gender mainstreaming approach and specific policy actions to create the conditions for women and men to enter, re-enter, and remain in the labour market. The Barcelona European Council agreed that by 2010 Member States should provide childcare to at least 90% of children between three years old and the mandatory school age and at least 33% of children under three years of age. The underlying factors of the gender gaps in employment, unemployment and pay (for example gender segregation) should be addressed and targets on the reduction of such gaps should be set without calling into question the principle of wage differentiation according to productivity and labour market situation.

Policy response

Employment and unemployment gaps are rarely addressed as such. Member States mainly refer to increased female participation. A further two Member States set national targets for female employment (AT and EL), now bringing the total to seven countries. The link between setting a target and developing a policy programme is not always clearly made. Reconciliation policy is generally seen as the only way to increase women's employment rate and reduce gaps. There is rarely a reference to removing financial disincentives related to wages and taxation. PT, EL, FR set national targets to reduce unemployment gaps or rates for women. ES and IT, two of the countries with the highest gender gaps in unemployment, do not present any specific initiatives.

The gender pay gap appears to be given a higher policy profile including through a more active role of the social partners (BE, IE, SE, DK, FI, FR, LU). FR and EL set national targets to reduce this gap, others present measures such as greater use of wage statistics, job evaluation systems, tool kits for enterprises and equal pay reviews, which should all have a positive impact. However, most actions are piece-meal, especially in countries with highest gaps (DE, PT, AT). Many initiatives are also voluntary with a lack of evaluation of impact. Countries with a high share of women in part-time work (the UK, the NL) have not analysed the implication of this on the gender pay gap. Many Member States link the gender pay gap with gender segregation, making it a more concrete policy priority than in the past. Apart from the Nordic countries, the UK, IE, NL, FR, AT, DE and BE mention in their NAPs initiatives with differing degrees of ambition (mainly related to educational choice and encouraging women to enter into technology sectors and occupations). Generally, policy efforts to reduce segregation do not seem sufficient, especially in view of recent increases in segregation in the majority of Member States. This is a pressing issue for countries with high female employment growth rates such as ES, IE, LU and AT.

Some Member States have improved opportunities to work part-time. Some still consider reconciliation a women's issue, whereas others recognise the role of men in care and family responsibilities (mainly by encouraging take-up or improving paternity leave schemes). Childcare is a policy priority in practically all Member States, even though the approach varies in focus and ambition. Regarding the 2010 EU childcare target of 33% coverage for children under 3 years and 90% for those over three up to mandatory school age, only SE, DK and BE (Flanders) reach the target for the young age group. For children above three the situation improves, but many countries exclude after-school care, which has a decisive role for parents' possibility to take up work. Those countries still facing the greatest challenges for increasing childcare provision, especially for 0-3 year old children, are IT, DE (old Länder), AT, LU, the UK, ES, EL, IE and PT. Many Member States set national targets for increasing childcare provision (BE, FR, EL, IE, PT, the UK). Policy often lacks a link between childcare expansion and the needs of the labour market, and little attention is given to quality and affordability. The potential traps in policies, which reinforce gender roles, like childcare allowance schemes or home care subsidies, do not seem to attract attention. Care of other dependants generally lacks concrete initiatives.

Gender mainstreaming continues to be weak and non-systematic (SE an exception), lacking gender impact assessment of existing systems and new policy proposals (except IE). The provision of gender desegregated statistics and the development of institutional mechanisms or tools for gender mainstreaming is given less profile in the 2003 NAPs.

Substantial efforts are thus needed to keep up momentum towards the 2010 Lisbon female employment rate target of 60% by reinforcing gender mainstreaming in the guidelines, with special attention to taxation and wages policies, and to the introduction of more family-friendly working time arrangements in those countries with low levels of female employment. Priority should be given to expand childcare services, especially for children 0-3 years old.

Noting that tapping the potential of female participation is both an issue of gender equality and a matter of economic effectiveness, the Taskforce urges Member States and Social Partners to:

- Remove financial disincentives to the participation of women, notably in relation to wages and taxation, including gender pay gaps;

- Increase the availability, affordability and quality of childcare and eldercare;

- Improve working arrangements, with measures to boost the attractiveness of part-time work and facilitate career breaks and flexible working;

- Tailor measures to the specific needs of disadvantaged women.

3.7 PROMOTE THE INTEGRATION OF AND COMBAT THE DISCRIMINATION AGAINST PEOPLE AT A DISADVANTAGE IN THE LABOUR MARKET

Key facts and challenges

The labour market situation of people facing particular difficulties continues to be much more unfavourable than the rest of the population. For several years definitions of disadvantaged people have varied between Member States due to the absence of an EU definition. Most cited groups of disadvantaged people are disabled people, migrants and ethnic minorities and (to a lesser extent) early school leavers and the low skilled. The situation of female disadvantaged people is often worse than of males. The unemployment gap between EU and non-EU nationals remains stable at the high level of 7.7% in 2002. Only FI displays an important reduction (by 8.3 percentage points compared to 2001), whereas in DK and BE the gap increased by 1.6 and 6.2 percentage points respectively. For the low skilled, young people, older workers, and disabled people, there remains an important challenge to increase labour market participation.

The EU average for early school leavers at 18.8 % in 2002 [19], represents a slight improvement on 2001 (19.4 %), still falling far short of the EU 10% target. The rate is particularly high in PT (45,5%), ES (29%) and IT (24,2%).

[19] Percentage of 18-24 year olds have achieved lower secondary education or less and not attending further education or training.

The integration of immigrants and disabled people, remains a key challenge in most Member States. This extends to other persons at risk such as low skilled, social benefit recipients or lone parents.

Policy response

Most Member States present policies to reduce the numbers of early school leavers. Measures range from increased co-operation between schools and companies (DE and NL) to more adapted pedagogy and increased personalised guidance of pupils in LU and FR. Most frequent policies to improve the labour market situation of people with disabilities are activation policies such as personalised support, increased participation in education and vocational training, improved legislation to promote integration of disabled, and tax incentives.

The majority of Member States continue to implement measures to support the integration of migrants and ethnic minorities such as literacy programmes, language courses, diversity plans to increase recruitment of migrants, training and vocational guidance, often funded through ESF programmes. Several Member States explicitly refer to the transposition of the two Article 13 Directives or point out additional measures such as awareness campaigns to tackle discrimination. Some also make the link between increased participation of immigrants as part of the solution to ageing and boosting labour supply (GL 5) and in relation to alleviating specific bottleneck professions (GL3). Only few Member States (NL, IE, DK, FI, SE) have set national targets for improving the labour market position of non EU-nationals or ethnic minorities. Also for other disadvantaged people such as people with disabilities or lone parents, not many Member States (NL, IE, PT, SE, UK) indicate measurable targets. Some of these targets refer to labour market outcome such as the UK target of an employment rate of 70% for lone parents whereas other targets aim to improve a specific situation as for the example the increase of participation to 95% of travellers in education in Ireland.

Employers should also be more involved in achieving the objective of increased participation of disadvantaged people, notably by using to the full the potential of diversity in the management of their human resources and by adjustments to the workplace and the introduction of flexible working patterns.

In this context, the Employment Taskforce has underlined the need for Member States and Social Partners to:

- Cut the number of young people who drop out of school early and give everyone a right of access to secondary education and a minimum level of basic skills;

- Build effective pathways to work and training for young people, including through personalised advice and guidance, and developing tailor-made programmes addressing the specific needs of people with disabilities;

- Pursue a multidimensional integration policy for migrants and non-EU nationals which facilitate participation in education and training, combat workplace discrimination, address the specific needs of immigrant women, promote business creation by immigrants and improve recognition of qualifications and competences acquired abroad.

3.8 MAKE WORK PAY THROUGH INCENTIVES TO ENHANCE WORK ATTRACTIVENESS

Key facts and challenges

There still exist financial disincentives for people to enter, remain and progress in the labour market. Recent findings on the extent of unemployment traps reveal marginal rates of taxation exceeding 85% in several Member States, against 70% in the US [20]. The declining trend in the tax rate on low wage earners in the EU-15 seems to have stalled with the tax rate stabilising at 37.8% in 2002. The implicit tax rate on employed labour continued its declining trend to 36.4% in 2002 expected to stabilise in 2003. However non-wage labour costs remains high in several Member States with a potentially negative impact on job opportunities and incentives. The high proportion of working poor remains a matter of concern in some Member States (PT, LU, ES, IT). Incapacity traps - i.e. disincentives for people on long-term sickness or invalidity to move into work - continue to be present in NL, UK, SE, LU.

[20] OECD calculations for a single person earning 67% of the average production worker's wage in 2001 and 2002. Calculations take into account the combined effects of tax and benefits on the income of a person moving from unemployment to work.

In order to raise labour force participation and to promote inclusive labour markets, it is essential to reduce remaining unemployment, inactivity and poverty traps. The Employment Guidelines call on Member States to review and, where appropriate reform to this effect their tax and benefit systems, including benefit duration and management, whilst preserving an adequate level of social protection. In particular, policies should aim at achieving a significant reduction in high marginal effective tax rates by 2010, and where appropriate, in the tax burden on low paid workers, reflecting national conditions.

Policy response

An increasing number of Member States are pursuing reforms to make work pay by addressing the combined impact of taxes and benefits (BE, FR, DK, DE, NL, SE, UK, ES). Reforms largely focus on reducing taxes and social contributions and introducing in-work benefits, reforms to incentives inherent in benefit systems have been less comprehensive. Such in-work benefit schemes or employment related premiums have been introduced or are planned by a growing number of Member States (BE, FR, NL, UK, IE), addressing at the same time the need to increase incentives to work and the issue of the working poor.

Several Member States need to tackle the disincentives to take up a low paid job by the inactive, mainly due to the loss of income dependent benefits combined with non-financial barriers to participation (such as insufficient access to training, lack of career prospects, difficulties to reconcile to work and family life, lack of childcare and other care facilities). Progress in effectively linking out-of-work benefits to activation measures is insufficient in many Member States.

Some Member States have tightened qualifying conditions for the eligibility or duration of benefits (DE, NL, SE, DK, BE). Despite progress there is still a widespread resort to early retirement schemes. Benefit, tax and pension reforms in some Member States encourage older workers to remain longer in work (ES, AT, SE, FI, DE, IE), but further reform is needed, particularly in Member States with low employment rates.

Many Member States continue to pursue efforts to reduce non wage labour costs, especially for low wage earners and the low skilled, by focusing on employer's social contributions (BE, FR, NL, LU, ES, EL) accounting for the biggest share of the labour tax burden. Others have announced further reforms over 2004-2007 (FI, AT, DK) while IE focused on a reduction in employees' social security contributions. A few address targeted tax reductions for women/lone parents to remain into reintegrate the labour market after an interruption (EL, ES, IE, FI), disabled people and (young/old) unemployed (EL) or taking up part-time jobs (FR). Information is lacking as regards gender segregation in tax-benefit systems particularly in relation to poverty risk or social exclusion. Family based taxation, where applicable, remains an important disincentive especially for women (DE).

The complex nature of unemployment, inactivity and poverty traps underlines the need for an integrated approach to make work pay covering both financial and non-financial work incentives including those aspects relating to quality of work. Progress also needs to be achieved in the measurement of such traps. Effective implementation of tax-benefit reforms rests upon further improving enforcement of eligibility criteria and strengthening benefit management. Decisive efforts are needed by some Member States (NL, UK, SE, LU) to reduce incapacity traps not only through reviewing tax-benefits systems and eligibility criteria but also by improving beneficiaries' workability. Possibilities of substitution between unemployment and other out-of-work benefits such as early retirement and incapacity benefits should be eliminated. Reforms in tax-benefit systems need to be linked to minimum wage setting to ensure adequate level of earnings to make the acceptance of work more attractive to low skilled unemployed and inactive.

In this context, and with a view to ending unemployment, inactivity and low-pay traps by adjusting the balance between tax and benefits, the Employment Taskforce has underlined the need for Member States to:

- Supplement low wages, where necessary, through the use of in-work benefits, as an incentive for workers to accept low-paid jobs, while maintaining wages at a level reflecting productivity,

- ensure that income-dependent benefits (such as family or housing allowances) fulfil their role of alleviating poverty without constituting a disincentive to take up a job,

- move from family-based income taxation systems to taxation systems based on individual income,

- make part-time work financially more attractive for parents or lone parents wishing to combine family with working life, and older workers wishing to combine gradual retirement with part-time work.

3.9 TRANSFORM UNDECLARED WORK INTO REGULAR EMPLOYMENT

Key facts and challenges

Undeclared work is an issue covered under a specific guideline for the first time. Estimates on the extent of undeclared work range according to national figures from 1.5% of GDP in UK to some 14,6% in IT [21],,, but many Member States do not give estimates. Moreover, national data are based on different sources and makes cross-country comparisons very difficult.

[21] The proportion of undeclared jobs compared to the total number of jobs (regular and non-regular) in Italy.

The difficulty Member States face in measuring the extent of undeclared work is the complex nature of the problem. Undeclared work affects the quality of work of those concerned, social cohesion, the overall business environment, The Employment Guidelines therefore call for a comprehensive approach, combining the simplification of the business environment, reforms in tax and benefit systems, improved law enforcement, the application of sanctions and efforts to measure the extent of the problem and the progress achieved.

Policy response

The NAPs confirm the generally increased priority given by Member States to the issue of undeclared work, and progress towards the implementation of comprehensive policy approaches,. Policy should rely on a mix of preventative actions and, sanctions [22]. Only a few Member States have plans to improve the knowledge of the phenomenon and its extent (FR, and PT). A number of measures are taken by Member States in the fields of simplification of administrative procedures for businesses and for the registration of employment and social security contributions which reduces the cost of compliance to the law and contribute to better quality employment data (BE, EL, FR, ES). To enhance work attractiveness several Member States report on tax related measures to prevent undeclared work and make work pay in the formal economy. These include measures to increase incentives for declaring household services (NL, BE, DE, FI and SE), increasing the threshold for non-taxable employment (BE and DE), or higher thresholds for VAT-registration (DK and FI) (see also Guideline 8).

[22] Confirmed by the Council resolution on transforming undeclared work into regular work (OJ C 260 of 29.10.2003).

Furthering the co-ordination between relevant authorities is a priority in several Member States for improved control of the declaration of work, including through the exchange of data. Special interdisciplinary teams have been set up in the UK and are planned in AT. In Italy, the Committee and Commissions for the surfacing of undeclared work, fosters the cooperation between relevant bodies and partners at national and local level. In a few Member States (BE, FR, IT and PT), co-operation with the social partners is an integrated part of their strategy to transform undeclared work to regular employment. Public awareness raising campaigns about the negative consequences of undeclared work are put in place in some Member States by way of a preventative instrument.

Several Member States (EL, BE, SE, IT, AT, NL, PT, FI and FR) take special measures directed at foreign workers or illegal immigrants. Emphasis is placed on illegal immigrants and includes improvements to the registration process of immigrant workers and increased sanctions for employers hiring workers without work permits. Measures aimed at integrating foreign workers legally residing in Member States concentrate on better information on labour market rights and increased control of working conditions (FI). Several Member States take targeted actions in sectors where undeclared work is most prominent. Such measures build both on a preventive approach such as incentives for the declaration of household services, and increased control. In DE and FR, the contractors' obligation for the conformity of sub-contractors of their declaration of employment is being clarified.

In this context the Employment Taskforce urges Member States to strengthen efforts to transform undeclared work into regular employment, in particular by addressing disincentives in tax and