We are currently witnessing radical changes in the European labour market that are challenging the institutions of the European welfare states. A new international division of labour is creating new opportunities as well as new threats for the European labour force. More and more employees of the old manufacturing industries are displaced or substituted due to the new international division of labour and the implementation of new technologies. Knowledge workers and service workers are replacing traditional white-collar workers at increasing rates. Many young people do not even regard a regular job as something rewarding but instead take advantage of the new opportunities to become ‘free agents’ and self-employed and engage in the networking of the new economy. The transnational corporations have enormous influence on the location of production and the distribution of wealth and are the main actors behind the internationalisation and new global division of labour. New powerful social dynamics are entering the scene, created by the growing importance of locality and of the competence of the labour force, the potential impact of global migration trends, and an increasing political awareness of the role of social capital as a condition for industrial innovation and social inclusion.

This chapter will discuss the future of some significant features of the European Union (EU) labour market by looking at the process of internationalisation and discussing the fundamental social and political dynamics of change that are already having an effect on European firms and wage-earners as well as on the European welfare states.

State of the European labour market

Despite the increasing level of employment many EU countries are still characterised by a low employment rate. The EU average is currently 61%, a decline since the 1970s when the rate stood at 64% and it has not yet recovered to the 1990 level in spite of four years of job growth. By contrast, the employment rate in the United States (US) was similar to the European rate in 1970, but has now risen to 75%. The EU average masks major regional differences, particularly in the highly performing smaller European countries and the UK. The difference in employment rates between the US and the EU is almost entirely explained by the higher numbers employed in the service sector in the US, which accounts for 90% of the net job growth (Sarfati, 2000).