Reforming Ukraine’s Labor Market: How War, Labor Shortages, and European Integration Are Rewriting Labor Rules
The transformation of employment in Ukraine has been underway for more than a decade. Population decline, labor migration, informal employment, technological change, and integration into the European economic space have gradually eroded the system of labor relations originally designed for the Soviet planned economy. Russia’s full-scale invasion has further exacerbated these problems while simultaneously accelerating changes that had previously advanced only slowly and piecemeal.
Ukraine’s labor market has long faced structural problems that the full-scale war has only intensified. Today, the economy is simultaneously grappling with labor shortages, significant unemployment, and high levels of economic inactivity. Businesses report labor shortages, especially in manufacturing, technical, and blue-collar occupations, while a substantial share of the population cannot find work or remains outside the labor force altogether. As of early 2026, around 46% of the working-age population was outside the labor force, while more than 140,000 people were seeking work through the State Employment Service. In other words, a paradoxical situation has emerged: jobs exist, yet many people either cannot or do not want to fill them because they lack the necessary skills, have limited opportunities for retraining, live far from potential workplaces, or consider wages too low.
These problems accumulated over many years due to a mismatch between the formal rules governing the labor market and the way the economy actually operated. Labor relations in Ukraine are still fundamentally governed by the 1971 Labor Code, originally designed for the Soviet planned economy (though subsequently amended). Over that time, the labor market has changed significantly: remote work, digital platforms, flexible forms of employment, short-term contracts, and new standards of worker protection have become increasingly widespread. However, the basic architecture of labor legislation remains poorly adapted to these changes.
As a result, a gap emerged between formal rules and reality. Businesses often avoid formally employing workers due to complex regulations and the high payroll burden, while workers accept informal employment as the only available option. In 2019, informal employment in Ukraine accounted for nearly 21% of total employment, while in some sectors — particularly agriculture and forestry — it reached around 43%. This model allowed employers to reduce costs while leaving workers without adequate social protection, paid sick leave, insurance, or stable labor guarantees.
Another systemic problem in Ukraine remains low labor productivity. This does not mean that Ukrainians work less — on the contrary, in terms of working hours, Ukraine does not lag behind EU countries. The problem lies in the low technological sophistication of production, weak automation, and the predominance of sectors with lower added value (extractive industries, agriculture, and trade). As a result, even before the war, labor productivity in Ukraine lagged significantly behind that of EU countries.
One of the reasons for low labor productivity, alongside an outdated production base, is the chronic mismatch between workers’ skills and the economy’s needs (the so-called skills mismatch). For years, employers have reported shortages of workers in technical, engineering, and blue-collar occupations, while the education system continues to produce large numbers of specialists in fields with lower labor-market demand. As a result, the economy simultaneously faces both labor shortages and underutilized human potential.
These structural problems gradually created demand for labor market reform. Next, we examine the steps the state has taken toward updating labor legislation, including the legalization of new forms of employment.
Updating labor legislation
The 1971 Labor Code was enacted to support a system of large state enterprises, stable long-term employment, and tightly regulated working conditions. The modern economy, however, functions much more dynamically: remote work, digital platforms, short-term projects, flexible schedules, and non-standard forms of employment have become widespread.
As a result, discussions in Ukraine long revolved around the need to adopt a new Labor Code. So far, however, instead of fully overhauling the system, the state has pursued a different path — gradually updating legislation by amending the existing Code and adopting separate laws to address specific labor market problems. In other words, the reform progressed as a series of targeted changes aimed at adapting the old system to new economic realities. The main changes took place along two lines. The first was the gradual formalization of the labor market and the promotion of formal employment. The second was the legalization of forms of work that already existed de facto in the economy but lacked a clear legal framework.
One of the state’s first major steps toward formalizing the labor market was the reduction of the unified social contribution (USC) rate in 2015 — from 45–49% to 22%. The high payroll burden incentivized employers to pay wages unofficially “in envelopes”, meaning they concealed part of workers’ actual income. The government expected that reducing the tax burden would make formal employment more attractive and encourage businesses to legalize wages and jobs. However, large-scale formalization did not occur, while USC revenues to the budget declined by 29%. Businesses used part of the savings to increase wages: in 2016, real wages grew by approximately 11.6% compared to 2015.
After that, the state began combining financial incentives with stronger oversight of informal employment. One such step was doubling the minimum wage in 2017 (from UAH 1,600 to UAH 3,200). At the same time, the state strengthened oversight of undeclared labor by expanding the powers of the labor inspectorate (inspectors from the State Labor Service gained the right to conduct unannounced inspections, verify the actual admission of workers to work, request documents related to the formalization of labor relations, etc.) and increasing penalties for employing undeclared workers. For example, allowing an employee to work without a formal labor contract could result in a fine of up to 30 minimum wages per worker.
Later, the state began digitizing labor relations: in 2021, the government introduced electronic employment records, digital tracking of employment history, and a gradual transition to electronic document management in the labor sphere. The idea was to reduce bureaucracy, simplify the formal hiring of workers, and make labor relations more transparent.
The second major area of reform was the legalization of new forms of work. The COVID-19 pandemic further highlighted the need to update labor legislation. During the pandemic, more than 35% of workers switched to working from home, while legislation provided no clear guidance on how such arrangements should be formalized or who was responsible for working conditions, equipment, working hours, and worker safety.
In 2020, Ukraine adopted a law on remote work. Before that, Ukrainian legislation recognized only home-based work: employees could work only from a specific workplace — at home or in another designated location. Remote work, by contrast, can be performed from any location the employee chooses (home, a café, a coworking space, etc.). In addition, employees do not necessarily have to follow a schedule established by a company’s internal rules; they may independently organize a schedule that is convenient to them, provided they complete the required number of working hours per week.
For employees, this created greater opportunities to combine work with family responsibilities or childcare. For employers, it provided a chance to retain teams even during lockdowns or security-related risks. During the war, for example, remote work became a way for some sectors to preserve employment, business processes, and companies’ labor potential despite workers relocating within Ukraine or abroad.
In 2022, Ukraine for the first time regulated employment with non-fixed working hours, in which a person does not work according to a fixed schedule but performs tasks when the employer requires their services. In practice, this became an attempt to legalize freelance and project-based employment. Even before the full-scale war, Ukraine ranked among the world’s fastest-growing freelance markets, while Ukrainian specialists were among the most active in IT, design, marketing, and digital services. However, these forms of work largely existed outside labor legislation or were structured through civil-law contracts.
The new contract format allows workers to officially work for several employers simultaneously while still receiving basic labor guarantees. In particular, employers are required to pay for a minimum guaranteed amount of work — at least 32 hours per month — even if the worker was not actually assigned tasks. At present, it is difficult to assess the results of these changes. This is partly because businesses continue to widely use civil-law contracts or the sole proprietor (FOP) model, which remain simpler and more familiar across many sectors of the economy.
European integration requirements for the labor market
To join the EU, Ukraine must not only formally align its labor legislation with European law but also shift the overall logic of labor market regulation. Ukraine has already implemented some of these changes. In particular, it has legally regulated remote and home-based work, digitized part of its HR processes (for example, through electronic employment records used to digitize employment history tracking), launched reform of the qualifications system, and legalized work with non-fixed working hours, thereby establishing a legal framework for freelance and project-based employment. However, a significant share of these obligations still remains to be implemented.
Read more here about how Ukraine can prepare for the free movement of workers within the European Union and why the mutual recognition of education and qualifications is a key prerequisite.
The key difference in the European approach is that the labor market is viewed not merely as a sphere of relations between workers and employers, but as part of a broader social protection system. That is why many European directives concern not individual procedures but the fundamental principles of labor organization: the transparency of labor relations, worker protection and safe working conditions, work-life balance, gender equality, and non-discrimination.
One of the key areas of harmonization is the transparency of working conditions. In the EU, employers are required to clearly inform workers about employment conditions, work schedules, pay, leave, and grounds for dismissal. Another area involves the regulation of platform work — work performed by couriers, drivers, and digital freelancers who find jobs through online platforms. In EU countries, minimum social guarantees and rules for determining employment status are gradually being established for such workers. Some of these principles have already been incorporated into Ukrainian legislation through regulations on remote work and new forms of employment. However, a large part of the labor market still operates through vague or semi-formal arrangements. One step toward regulating digital employment was draft law No. 15111-d, registered on April 6, 2026, which introduces new taxation rules for income earned through online platforms (such as OLX, Bolt, Kabanchik, Airbnb, or Upwork). Adoption of this draft law would move part of the platform and freelance employment out of the “gray” zone and formalize the rules governing the digital labor market.
Another major area of change concerns pay and gender equality, with the EU Pay Transparency Directive serving as the benchmark. The directive establishes several important obligations for employers: indicating salary ranges in job postings; granting workers the right to receive information about the average level of pay received by workers of different genders performing the same or equivalent work; defining criteria for pay and career advancement; prohibiting employers from requesting information about applicants’ previous salaries; and requiring large companies to regularly report on gender pay gaps. If the gender pay gap exceeds 5% and cannot be justified by objective, gender-neutral factors, employers are required to conduct a joint assessment of the pay system together with employee representatives and eliminate the identified inequality within six months. In practice, this means a gradual departure from opaque pay practices, where workers do not understand why they receive different pay for similar work.
Another area concerns work-life balance. European legislation is gradually moving away from the model in which childcare is considered to be solely the responsibility of women. A key requirement is ensuring equal rights for both parents to participate in child-rearing and childcare, particularly by introducing additional periods of parental leave after childbirth, individually allocated to each parent and non-transferable. This is intended to encourage men to take a more active role in raising children and reduce the “motherhood penalty” women face in the labor market. It is also important to consider EU standards regarding working hours, rest periods, and working conditions. Formally, Ukrainian legislation already includes basic guarantees regarding the length of the working week, daily and weekly rest periods, and leave. However, the key task is not so much codifying these norms as ensuring they are actually enforced and bringing them closer to the European oversight model. In particular, the system for recording working time requires strengthening. In the EU, such systems are mandatory tools for protecting workers’ rights and for recording actual working hours, including overtime. In Ukraine, time recording is often largely formal, which complicates effective oversight of compliance with working-time rules.
European integration-related changes concern not only laws but also the state’s institutional capacity to ensure their implementation. In the EU, considerable attention is paid to the effectiveness of labor inspectorates and the effective oversight of working conditions. In Ukraine, by contrast, the oversight system long remained weak and often focused on formal inspections.
The new Labor Code
Despite numerous changes over the past few years, Ukrainian labor legislation remains fragmented. That is why the next step in the reform will be to update the entire system of labor relations through the adoption of a new Labor Code, intended to systematize existing rules and create a unified regulatory framework for both “traditional” and new forms of employment.
Updating the Code is necessary not only because the legislation is outdated, but also because of structural changes in the labor market: the war has intensified labor shortages, accelerated migration, and changed the structure of employment. Businesses increasingly speak of the need for more flexible labor relations, faster hiring, and reduced bureaucratic burdens. At the same time, workers need clear rules protecting their rights in new forms of employment. In addition, the new Code is part of the European integration process: it implements more than 30 EU directives in the field of labor.
At the beginning of 2026, the Cabinet of Ministers registered a draft new Labor Code in the Verkhovna Rada. The document has already been included on the parliamentary agenda, and the Committee on Social Policy and Protection of Veterans’ Rights recommended adopting it as a basis, subject to revisions before second reading.
Among the key innovations is a clear definition of the characteristics of labor relations. The draft Code establishes eight criteria to determine whether relations between a worker and an employer constitute labor relations, even if they are formally structured through a civil-law contract or through cooperation with a sole proprietor (FOP). These include:
the regular performance of work within a specific profession;
employer control over the labor process;
the existence of work tasks defined by the employer;
the establishment of work schedules and rest periods;
employer reimbursement of work-related expenses (travel and other work-related costs);
the performance of work at a location designated by the employer and according to company rules;
the provision of equipment;
regular payment for the work process itself rather than solely for the final result.
The draft also allows workers to enter into multiple labor contracts with the same employer. For example, a person could simultaneously perform different functions or work on several projects within one company under different pay and working-time arrangements.
In addition, the new Code proposes digitizing labor relations and granting electronic documents the same legal status as paper documents. This applies to labor contracts, orders, employee applications, HR documents, and companies’ internal document management.
The labor inspection system is also expected to be updated by replacing mass inspections with a risk-based approach, under which inspections would focus more on sectors and employers with high risks of labor law violations or informal employment.
According to preliminary estimates by the Tony Blair Institute for Global Change, the new inspection model could stimulate the transition of 110,000-210,000 jobs into the formal sector and generate an additional UAH 9–19 billion in annual revenues. The digitalization of processes could also save businesses around UAH 226 million, while reducing the number of disputes and accelerating the formal hiring of workers.
The draft proposes expanding the number of labor contract forms from six to nine. In addition to the classic model of permanent employment with a fixed schedule, the new Code regulates remote and home-based work, contracts with non-fixed working hours, seasonal employment, and apprenticeship employment. The latter would allow young people to officially combine education with their first job. Such contracts would provide flexible schedules adjusted to studies, lower requirements for experience and qualifications, and basic labor guarantees (formal employment, USC contributions, paid sick leave, and leave). According to preliminary scenarios, regulating this form of employment could generate approximately UAH 3.4 billion in annual tax revenues.
A separate block of innovations concerns work-life balance. For example, the minimum annual paid leave is proposed to increase from 24 to 28 days, while the duration of social leave would be reduced. The Code proposes granting both parents equal rights to childcare leave. The draft provides for an additional four months of parental leave after the birth of a child. Of this, two months would be reserved for the mother and another two for the father. Their portions could not be transferred to the other parent, meaning each parent would independently decide whether to use them.
At the same time, the reform has also sparked debate. Trade unions and part of the expert community fear that, under the banner of flexibility, workers’ labor guarantees could be weakened. In particular, concerns have been raised regarding simplified dismissal procedures (since the draft does not specify which repeated violation could justify dismissal), workplace surveillance of workers, and the weakening of trade union influence (the draft Code proposes removing trade unions’ right to demand the dismissal of a director who violates the law).
Changing employment policy
For a long time, Ukraine’s employment policy remained largely passive. The State Employment Service’s main function was registering unemployed individuals and paying benefits, while its influence on the labor market’s actual structure remained limited. This largely reflected the system’s funding structure: in 2017, more than 70% of the Unemployment Social Insurance Fund‘s budget was spent on unemployment benefits, while less than 5% was allocated to active employment measures (vocational training, retraining and upskilling, and training vouchers).
The problem became particularly acute in 2014-2015, when the first wave of internally displaced persons (IDPs) revealed the complete institutional inability of the State Employment Service (SES) at the time to respond quickly to shocks. According to research by the National Academy of Sciences from 2016, only 30% of registered IDPs who applied to the SES found jobs. The main reasons were the lack of up-to-date information on vacancies and labor market conditions, as well as the SES’s focus on registering unemployed individuals rather than training and placing them in jobs. The SES mainly performed a social function rather than acting as an active intermediary between employers and workers. As a result, much of the job search effectively shifted to private digital platforms.
The key stage in changing the underlying philosophy began with the realization that unemployment status could not serve as a long-term survival strategy. The full-scale invasion accelerated the shift toward a strict but pragmatic model of “returning labor to the economy”. Limiting unemployment benefit payments in 2022 to 90 days over a two-year period (previously 360 days over two years), along with capping maximum benefits at the minimum wage for the duration of martial law, effectively made unemployment status less protected and less “advantageous”. This led to a more than twofold decline in the number of officially registered unemployed individuals compared to the pre-war period, indicating a reorientation toward independent job searches or participation in retraining programs.
Amid a sharp decline in employment alongside simultaneous labor shortages, the state was forced to rely more heavily on active labor market support instruments, particularly the promotion of self-employment and small business development. This transition was accompanied by the rollout of the government’s large-scale “eRobota” business grant ecosystem. The project includes six grant areas: microgrants for starting a business (the “Own Business” program), financing for processing enterprises, funding for orchard planting, support for greenhouse farming, grants for startups, including in the IT sector, and financing for IT training. Between July 2022 and March 2025, more than 25,000 grants worth over UAH 12 billion were issued. Both entrepreneurs and individuals with no business experience can apply for this support. A mandatory condition for receiving funds (up to UAH 250,000) under the most popular “Own Business” program is the creation of one or two jobs, depending on the size of the grant, whereas other programs require creating up to several dozen jobs. As of early 2026, this instrument had supported the creation of more than 46,000 jobs, while supported businesses had paid more than UAH 5.9 billion in taxes and fees to budgets at all levels — equivalent to 50% of the funds invested by the state.
Another important direction was the system of vocational training and retraining for adults, which formed a new operating model for the employment service after 2022. One of the key instruments was training vouchers, which allow, for example, people over 45, IDPs, and veterans to obtain a new profession or improve their qualifications free of charge through educational institutions. At the same time, vocational training programs for unemployed individuals and short-term training tailored to labor market needs were expanded. According to the State Employment Center, 93,000 people completed training in 2025 alone, while the post-training employment rate reached 88%. The programs focused primarily on occupations experiencing the greatest labor shortages: healthcare (including pre-medical and patient care), transport, construction, education, psychology, and technical professions. In 2025, UAH 241 million was spent on retraining programs.
In the fall of 2022, the SES restructured the public works program as a temporary employment instrument through the “Recovery Army” project. Under this initiative, participants perform socially useful work in communities, particularly rebuilding infrastructure, assisting affected citizens, and constructing protective structures and fortifications. Overall, since the initiative’s launch, around 300,000 referrals to public works have been issued, including 78,000 in 2025 alone. In 2025, UAH 734 million was spent on the program.
Another important vector of reform involved revising the inclusivity policy. In 2023, Ukraine introduced a mechanism for compensating employers for the costs of workplace accommodations for persons with disabilities, supplementing the existing system of administrative liability for failure to meet employment quotas. In this way, state policy gradually shifted from a purely punitive approach toward a combination of oversight and incentive-based instruments.
Another important change was the digitalization of the labor market. Much of the interaction between employers, workers, and the state moved online. Electronic accounts, digital employment service tools, and private job-search platforms effectively created a new employment infrastructure. Since 2025, the “Obrii” analytical information system has been gradually introduced through the integration of the SES database with the Diia ecosystem. It provides centralized registration of job seekers and vacancies, digital interaction between the employment service and state registries — including the Pension Fund of Ukraine and the State Tax Service —, and the automation of data exchange. This enables improving the accuracy of verifying the status of social support recipients, reducing the volume of manual information processing, and minimizing the risk of data duplication or inconsistencies across registries.
Reforming the qualifications system
A logical and necessary complement to changes in employment policy was a fundamental reform of the qualifications system.
The first systemic stage of the reform was the creation of the National Qualifications Framework (NQF), approved by the Cabinet of Ministers back in 2011. Its introduction formed part of the adaptation of Ukrainian education policy to European approaches and represented an attempt to shift from a “diploma-based” model to a “competency-based” model. The NQF is structured according to the logic of the European Qualifications Framework (EQF), which EU countries use to compare educational and professional levels.
Before the NQF was introduced, Ukraine’s education system effectively equated qualifications with the attainment of a diploma from an educational institution. At the same time, employers often received no answer to the key question of what practical skills a worker actually possessed. The National Qualifications Framework changed the evaluation principle: learning outcomes (knowledge, skills, communication competencies, and levels of responsibility) that individuals can demonstrate in practice became central. In the case of formal education, educational institutions design courses to ensure the acquisition of all necessary knowledge, skills, communication competencies, and levels of responsibility, and structure examinations to verify mastery of them. In the case of non-formal education or self-education, qualification centers assess levels of knowledge and skills (more on this below).
The National Qualifications Framework consists of eight levels synchronized with the European Qualifications Framework. Each level describes not a type of diploma but the complexity of a person’s competencies: from basic practical skills to the ability to conduct research, manage complex processes, and create new knowledge. Lower levels (1-5) cover basic and vocational education, while higher levels (5-8) correspond to bachelor’s, master’s, and doctoral levels of education (junior bachelor’s and professional qualifications correspond to Level 5). Crucially, the NQF for the first time created a unified framework linking education and the labor market. Whereas diplomas had previously served as the final confirmation of qualifications, the new model enabled comparisons of outcomes from formal education, vocational training, corporate training, and practical experience.
The next stage involved building the institutional foundation of the reform. In 2017, the new version of the Law “On Education” for the first time distinguished, at the level of basic legislation, between formal education, non-formal education (training sessions, clubs, and courses), and informal education (self-education). This created the legal basis for recognizing skills acquired outside the traditional education system, such as through short courses, corporate training, workshops, or self-study.
In 2019, the National Qualifications Agency (NQA) was established — a body that serves as a coordinator between the labor market, employers, and the workforce training system. One of its key tasks was introducing professional standards as an alternative to the outdated Classifier of Occupations inherited from the Soviet economic model.
The core idea of the reform was to align Ukraine’s system with the European qualifications framework, which emphasizes verified worker competencies rather than formal education. That is why, alongside professional standards, Ukraine also began developing a system of independent assessment of qualifications and qualification centers. Their role is to confirm professional skills regardless of where a person acquired them — at a university, in the workplace, or through short educational programs. Qualification centers became the equivalent of the independent professional certification systems common in EU countries.
The core idea of the reform was to align Ukraine’s system with the European qualifications framework, which emphasizes verified worker competencies rather than formal education. That is why, alongside professional standards, Ukraine also began developing a system of independent assessment of qualifications and qualification centers. Their role is to confirm professional skills regardless of where a person acquired them — at a university, in the workplace, or through short educational programs. Qualification centers became the equivalent of the independent professional certification systems common in EU countries.
Reform of the qualifications system advanced slowly for many years because of the inertia of the education system and weak ties between universities and business. At the same time, its development was an important component of Ukraine’s European integration, as it involved harmonizing Ukraine’s qualifications system with European approaches and the European Qualifications Framework. After 2022, this reform shifted from the category of long-term educational change into the sphere of economic necessity: labor shortages, structural changes in the labor market, and rapid technological change forced employers to increasingly focus not on formal diplomas but on workers’ actual skills and the speed with which those skills can be acquired.
What lies ahead for the reform?
The future trajectory of labor market reform will depend not only on the pace of legislative change but also on the economy’s ability to adapt to a complex set of interconnected challenges. The STEEPLE analysis and subsequent application of the Future Wheels foresight method demonstrate that the key drivers of change include war, labor shortages, and the European integration process, which, in various combinations, shape possible trajectories for Ukraine’s labor market.
Foresight methods are tools for systematic analysis of the future that enable identification of trends and anticipation of their impact on social relations. Unlike traditional forecasting, foresight does not seek to predict a single, exact future; instead, it develops a range of alternative scenarios. The Future Wheels foresight method enables identification not only of direct but also of indirect pathways through which different factors exert influence.
The first key factor is labor shortages. According to forecasts, even under an optimistic refugee-return scenario, Ukraine will still lack between 3.1 million and 4.5 million workers to sustain annual GDP growth of 5-7% through 2030. This will force the state to shift toward policies stimulating the economic participation of groups that have traditionally remained outside the labor market: women with young children, older people, and persons with disabilities. In practice, this will require further development of inclusive infrastructure and the expansion of flexible employment programs. It is precisely through such mechanisms that these groups will be integrated into the labor market, since traditional forms of employment remain limited for them.
Another equally important challenge is the large-scale reintegration of veterans into the labor market. This concerns not only returning people to economic activity but also adapting their skills and providing psychological and professional retraining. This creates additional demand for rapid training programs and for individualized employment pathways that combine the state’s social and economic functions.
The second vector is synchronization with the European labor market. As part of implementing the Ukraine Facility plan and the EU accession negotiation process, Ukraine is gradually harmonizing labor legislation with European approaches. Above all, this concerns aligning labor legislation with EU directives in the areas of pay transparency, platform employment regulation, and standards for organizing working time.
Thus, Ukraine is simultaneously moving in several directions: it is being forced to respond to short-term shocks related to war and migration while also adapting its institutional architecture to the long-term requirements of European integration and the technological transformation of the economy. The key limitation on change is not only the size of the available labor force but also the speed at which the system can change rules, institutions, and workforce training mechanisms.
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