22 April 2021

Western Europe is facing a brain drain as smaller countries attract high tech jobs

By Dr Nima Sanandaji & Klas Tikkanen

Smaller European economies, like Cyprus and Malta, rarely attract much attention from foreign observers, but under the radar they have been introducing business friendly tax systems and regulations to attract high tech, high skilled industries. The pandemic has accelerated the shift of these ‘brain business’ jobs away from northern and western Europe – and the consequences for the region’s international competitiveness will be far-reaching.

Knowledge-intensive jobs went into a recession during 2020, but the share of people working in industries such as tech, information and communications technology [ICT], advanced services, and creative professions is continuing to grow. This is particularly pronounced in eastern and central Europe, where the rate of increase is fastest. The latest brain business jobs index, which maps the proportion of the working age population employed in these sectors across Europe, has found that Cyprus has experienced an almost 50% increase of brain business jobs per capita since 2014, while Slovakia, Hungary, Poland, Latvia, Portugal, and Bulgaria have experienced an increase of a third or more.

Before 2020, knowledge-intensive jobs were growing steadily in Europe. Between 2013 and 2019, on average 509,000 brain business jobs were added on a yearly basis, to the economies of the EU-member states plus the UK, Switzerland, Norway, and Iceland. In 2020 however, the number of brain business jobs fell for the first time, by nearly 167,000. The exception is the Nordic region, which added 8,600 brain business jobs during 2020, despite the global corona crisis.

Overall, knowledge-intensive companies have fared better during 2020 compared to the rest of the economy. The volume production of all manufacturing firms fell by 16% during the second quarter, as compared with same quarter previous year, but only by 8% in the tech-sector. During the third quarter, the total manufacturing index of production fell by 4%, but only 2% in the tech-sector.

However, the creative professions experienced a significant fall of volume index of production, in the form of a 21% drop in the second quarter and 9% in the third quarter. An explanation is that parts of the film, television and music sectors have experienced significant difficulties in keeping up production, due to the social distancing made necessary by the corona pandemic.

The ICT sector also stands out, since its volume index of production has increased by 1% in the second quarter of 2020, and 2% in the third quarter, compared to same quarters the previous year. The fact that the ICT sector has experienced a slight increase of production, but also a reduction of jobs, during the year, can be explained by increased automation. The pandemic has given rise to a significant shift towards the digitalization of the economy, making it more common for employees to work from home, as well as speeding up the already on-going transition to online shopping. If current trends continue, within a year or two ICT will outpace tech as Europe’s main brain business sector.

However, it is the changes in the geographical distribution of these jobs that is perhaps most significant. Among the largest European economies, Spain and Germany have a relatively good growth of brain business jobs over time, with the UK, France and Italy having a relatively slow pace of growth. The knowledge jobs are instead rapidly forming in numerous smaller European nations, and the regions with lower brain business jobs concentration are gradually catching up to northern and western Europe.

These countries play a key part in the changing landscape, boosting Europe’s entrepreneurial potential. What remains is for the UK, France, Germany, and other larger European nations to follow suit, by opening up to market reform.

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Dr. Nima Sanandaji is director of ECEPR. Klas Tikkanen is COO Nordic Capital.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.