Euro Zone Labour Market Resilience

FRANKFURT (Reuters) – The euro zone labour market’s exceptional resilience is unlikely to last as the one-off factors driving its strength are waning. However, there is no dramatic weakening on the horizon, according to European Central Bank (ECB) research published on Monday.

Unemployment currently stands at a record low of 6.3%, as firms continue to hire. This situation poses a puzzle since the bloc’s economy has stagnated over the past year, which historically suggests a growing weakness in the labour market.

Typically, employment grows at about half the rate of real GDP growth; however, since 2022, it has surpassed GDP growth, as noted by the ECB.

> “The euro area labour market’s performance has been exceptional compared to changes in output,” the ECB stated in an Economic Bulletin article. “Rising profit margins enabled firms to retain their workers for longer than usual, despite falling revenues.”

Currently, real wages are rising, aligning closer to historical trends, and energy prices – a significant cost factor – are stabilizing, which mitigates the disconnect between output and employment.

Labour hoarding reached its peak in the third quarter of 2022, and firms’ propensity to retain employees is now diminishing, according to the ECB.

> “The euro area labour market is expected to return closer to its historical correlation with output,” the ECB remarked.

Despite concerns from some policymakers about potential rapid erosion in the labour market leading to reduced disposable incomes and weakened demand – which could lower inflation more than currently anticipated – the ECB’s study does not support such fears.

> “The unemployment rate is expected to remain low over the coming quarters,” the ECB stated. “Overall, survey data suggest a relatively stable labour market looking ahead.”