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4th Mar 2024

Opinion

The eurozone labour market is not as strong as you think

  • Working hours haven't recovered to pre-pandemic levels (Photo: Chris Goldberg/Flickr)
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Eurozone labour markets have impressed with their resilience during the past year. Even as economic growth falters, all member states are currently at or very near the highest employment rate on record.

In Q1 2023, there hadn't been such a big gap between employment and GDP growth since 1995 (other than during the financial crisis and the pandemic).

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Look closer, however, and the picture is not so rosy. According to the European Central Bank, although between Q4 2019 and Q4 2022 the number of employed people increased by 2.3 percent, the average number of hours per worker declined by 1.6 percent, dampening the total hours worked.

So, what is driving the fall in average hours worked at a time when many new jobs are created?

First, employment is rising in sectors where people tend to work less hours: 65 percent of new jobs are in the public and construction sectors (although these sectors only make up 30 percent of jobs). The key question is whether this is a lasting trend, as that could have a significant impact on productivity.

Second, labour hoarding may have played a role.

Average hours recovered in 2021 and early 2022, but when the economy slowed in the second half of 2022, they stagnated while employment continued to increase. However, labour hoarding is a very difficult phenomenon to measure, as companies behave in different ways in different countries and sectors.

Another explanation could be that firms had been operating with too low levels of staff post-pandemic and have been hiring to restore a more "normal" headcount. Productivity per hour worked was 104.7 in 2021, and 104.6 in 2022, compared with 102.5 in 2019, which suggests that perhaps productivity was overly stretched as firms sought to keep up their production levels with too small a workforce.

More sick leave

A last reason for the fall in working hours could be that more people are taking sick leave: according to the ECB, sick leave in 2022 was 10-30 percent higher than in 2021.

This could be due to weaker immune systems as a result of the pandemic, or ongoing health concerns that may have prompted more individuals to take sick leave when experiencing even mild symptoms to avoid potential contagion and protect their own health, as well as that of their colleagues.

In any case, although employment is at record-high levels, the eurozone's labour market faces serious long-term challenges, most notably a fall in labour supply due to ageing populations: the eurozone's young adult labour supply is around 10 percent lower than in 2007.

And despite the fact that the labour force participation rate is higher than before the pandemic, it has been in a downward trend since 2007, and the rise is probably because of temporary factors.

Countries with higher inflation rates at the end of 2022 have seen larger increases in labour market attachment, suggesting that the cost of living crisis has incentivised people to return to work. Another long-term challenge that countries face is skill mismatches. There is often a disconnect between the skills possessed by the labour force and the skills demanded by employers, which has resulted in high unemployment among certain groups, particularly young people.

If employment is not as strong as headline figures suggest, this has important implications for monetary policy, and raises questions over whether the ECB is tightening too aggressively, as the central bank has cited an overheated labour market as the main reason to hike rates.

Policymakers should delve deeper into the dynamics of the labour market, to understand not only the quantity but also the quality of jobs, the factors influencing working hours, and the true nature of labour force participation.

Author bio

Carla Subirana is an economist at Oxford Economics,and worked as a policy analyst for the Bank of England and Europe research analyst for Economist Intelligence.

Disclaimer

The views expressed in this opinion piece are the author's, not those of EUobserver.

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