In the context of rapid technological change, a flexible labour market is essential to facilitate the adjustment of human capital to labour market needs. A high level of rigidity in the labour legislation has a particularly strong negative impact on industries experiencing rapid technological change, since it may prevent the efficient matching of workers to jobs in view of new job requirements.
Unfortunately, progress in increasing contractual flexibility, particularly for permanent contracts, remains slow in several euro area countries. Flexible wage setting is also essential. In a number of economies, characterized by mediocre relative competitiveness, it is important that wage increases do not fully exhaust productivity gains and allow productivity performance to translate into improved competitive positions as measured by relative costs.