An analysis of recent data released by the European Commission shows a still solid overall performance in the EU labour market, although the pace of improvement appears to be slowing. By the fourth quarter of 2007, total employment had increased by 3.3 million from a year earlier to reach 224.5 million, while unemployment had dropped to 16.1 million by the first quarter of 2008.

However, quarterly employment growth halved in the last quarter of 2007 after the strong performance at the beginning of the year, and recent forecasts suggest that the unemployment rate may well bottom out in 2008.

Year-on-year employment growth was still a solid 1.5% in the fourth quarter of 2007, but the quarterly rate declining from 0.4% in the previous quarters to 0.2% in the last quarter.

The sustained employment growth was notably the result of strong performances by Germany (which reached the EU's employment rate target of 70% in the last quarter of 2007), Poland (now approaching the employment rate of Italy) and Spain (although recently showing a strong loss of momentum). With the exception of Hungary and Lithuania, all Member States experienced continuing employment growth; in particular, Ireland, Latvia, Luxembourg, Malta and Slovenia, where it exceeded a year-on-year 3%. As a result, the overall EU employment rate came close to 66%, by the fourth quarter of 2007, up one percentage point from a year earlier.

The strong labour market performance continued to be driven by the services sector, whereas a slackening of the employment situation became visible in the construction sector. However, the overall job vacancy rate remained constant at around 2.2%, indicating a continuing tight labour market at the end of the year.

The average EU unemployment rate recorded yet another drop in the first quarter of 2008 to reach 6.7%, down from 7.4% a year earlier. This resulted from continuing strong falls in the unemployment rate in Poland (down 2.7 percentage points on the year), but also in Germany and France. On the other hand, the labour market situation in Spain is showing signs of deteriorating, reflected by a rise in the unemployment rate (up by 1 percentage point on the year) to the second highest level in the EU after Slovakia.

Growth in hourly labour costs in the EU has picked up to an annual rate of 3.5% in nominal terms in the fourth quarter of 2007, a result of strong wage increases in the new Member States, only partly offset by modest wage growth in Germany. Nevertheless, taking into account trends in productivity growth and inflation, this reflects only a slight change in real unit labour costs in the EU.

Recent developments such as financial turmoil, rising energy and commodity prices and falling consumer confidence may result in the macroeconomic outlook deteriorating further. The so far resilient EU economy is expected to experience a slow down in 2008-2009 and the improvement in the labour market will be less marked than recently, with a slower pace of employment growth and a halt to decreases in the unemployment rate.