A high level of employment protection legislation may have 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, has been disappointingly slow in several euro area countries.
Wage flexibility also has an important role to play in the smooth functioning of markets. Structural rigidities in wage setting, by not allowing firms and sectors to remain competitive and not sufficiently reflecting existing levels of unemployment, reduce market opportunities for firms and thereby limit labour demand, investment and long-term growth.