Is the eurozone labor market as strong as rate setters think?

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Eurozone rate setters are increasingly concerned about an apparent disconnect between a seemingly buoyant labor market and growing signs of economic stagnation. Unemployment in the region is at a record low and companies are struggling to fill vacancies. But the eurozone economy has suffered a slight contraction in the last two quarters. The disconnect between labor market strength and growth weakness lies in a drop in worker productivity, contributing to a 5.5 percent inflation rate that remains too high for policy-setters' liking. rates. The hawks at the European Central Bank intend to avoid the fate of the United Kingdom, where the tight labor market is exacerbating inflation even higher than in the eurozone. They want further increases in borrowing costs, even though they have already raised their benchmark deposit rate by 4 percentage points to 3.5 percent. Christine Lagarde, president of the ECB, has warned that unless companies are willing to “absorb” the cost of falling productivity, monetary policy will have to be even more restrictive.

Some economists believe further rate increases could eliminate jobs without having much impact on prices. So what conclusions about the labor market should the ECB draw ahead of its next monetary policy meeting later this Job Function Email Database month? People are working fewer hours. At first glance, the employment recovery in the eurozone has been almost as impressive as in the US. Figures released last week showed unemployment in the eurozone remained at a record low of 6.5 percent in May, even as the economy stagnated. Business surveys suggest that labor shortages remain widespread and that companies are eager to hire, even if the vacancy rate has fallen slightly from a post-pandemic peak. You are viewing a snapshot of an interactive chart. This is most likely because you are offline or JavaScript is disabled in your browser. However, although there are more jobs, and a greater proportion are full-time, people work fewer hours on average. This could reflect a growing preference for leisure time after the dislocation of the Covid pandemic led people to rethink their priorities.



Peter Schaffrik of RBC Capital Markets said the shorter work hours reflected “lasting behavioral changes. . . which is unlikely to be reversed.” The ECB suspects it has more to do with labor hoarding, where companies hold on to workers even when business declines because they worry they won't be able to easily rehire when the economy recovers. Either way, companies will have to hire more staff just to keep production constant. This, in turn, could mean that interest rates need to rise and stay high for longer, to keep wage pressures in check. Most of the employment growth occurs in the least productive sectors The ECB has drawn attention to another factor that could explain the disconnection between employment and growth: much of the job creation has occurred in the public sector, where the working day tends to be shorter, and in services, where Productivity tends to be below average. in the industry. This is especially true in Germany and Spain, where an increase in hiring in health and education has offset sluggish private sector demand.