Growth in euro area labor quality

Composition of the euro area workforce evolves over time and in response to changing labor market conditions. We construct an estimate of growth in euro area labor quality over the period 1983-2005 and show that labor quality has grown on average by 0.47 percent year-on-year. Labor quality growth was significantly higher in the early 1990s than in the 1980s. This strong increase was driven mainly by an increase in the share of those with tertiary education and workers in prime age. Growth in labor quality moderated again toward the end of the 1990s, possibly reflecting the impact of robust employment growth resulting in the entry of workers with lower human capital. The contribution of labor quality to labor productivity has increased over time, accounting for up to one fourth of euro area labor productivity growth. The results point to a lower contribution of total factor productivity to euro area growth.