After the double-dip recession in recent years and the recovery that started in the beginning of 2013, in early 2016 the eurozone’s GDP returned to a level close to its pre-crisis peak in Q1 2008. However, the same does not hold true for the major labour market indicators, which, despite unquestionable signs of improvement, remain far removed from the levels they were at eight years ago.
There has been a substantial recovery of the labour market, but it is lagging significantly behind GDP. Starting with the most commonly observed labour market indicators, on a eurozone-wide scale, full employment has only erased just over two-thirds of the maximum loss seen during the crisis years (generally between Q1 2008 and mid-2013), while the unemployment rate and the total number of unemployed have declined by just over one-third (see Chart 1 and the table at the end of this article).1
A slightly closer examination of jobs lost and created demonstrates that these initial indicators, as poor as they may be, still paint an overly positive picture of the real situation, primarily for the following reasons:
As a result, the eurozone labour market still seems quite distant from a situation that would generate widespread wage pressures. It is true that the unemployment rate (10.1% at the end of May) is no longer so far from official estimates of the level that is supposed to trigger an acceleration of inflation (NAIRU2 reported by the OECD at 9.4% and NAWRU3 reported by Eurostat at 9.7%). However, in light of the factors mentioned above (the pool made up of people working part-time for economic reasons, other indicators that remain very depressed in some countries), it seems likely that the NAIRU will be revised downward (as has occurred in the United States several times in recent years), without, however, excluding pockets of localised (especially in Germany, although the gradual entry of refugees into the labour market could be a moderating factor of wage growth) or sector wage pressures.
However, despite this very incomplete repair, the recovery has been reflected in the labour market in increasingly tangible ways since 2015. Because employment and unemployment rates typically lag behind GDP, they usually react slowly during the initial phase of a recovery (and this all the more when the recovery itself is slow). As the new European growth cycle is now in its fourth year, some signs of acceleration have started to show in several major indicators, including those reflecting the most deleterious and lasting consequences of the crisis.
Firstly, the unemployment rate itself has begun falling more rapidly over the last 12 months (-0.9pp between May 2015 and May 2016, after -0.6pp between May 2014 and May 2015) while the GDP growth rate was not accelerating to the same extent. Looking at the last projections published before the Brexit shock, we note that although the ECB had considerably lowered its 2016 and 2017 growth forecasts relatively to those published 12 months ago (from 1.9% and 2.0% in June 2015 to 1.6% and 1.7% in June 2016), it had not simultaneously increased its unemployment rate projections (down slightly, on the contrary, from 10% to 9.9%).
What’s more, we note that 2015 marked the beginning of a positive recorrelation among Member States: the unemployment rate fell in Italy, which was not the case in 2014 (the Italian economy took a very long time to return to growth), and even in France starting in late 2015 (a country where the relative demographic strength means that a higher pace of job creation is required, relatively to neighbouring countries, for the unemployment rate to decline).
Furthermore, among the indicators reflecting the lasting effects of the crisis, the long term and very long term unemployment rates, which declined only very modestly in 2014, fell significantly in 2015 after having doubled (or more) with the onset of the crisis (see Chart 4). While it is wise to be cautious with these figures (many very long-term unemployed workers have probably dropped out of the labour force), labour market reforms implemented in recent years probably played a part. In particular, we note that France, which implemented only modest labour reforms, is hardly touched by this improvement.
Lastly, the percentage of NEETs (Youth Not in Employment, Education or Training) fell faster in 2015 than in previous years. We also saw a few signs of a falling NEET in Italy, where this indicator is particularly high (casting youth into a situation that in many respects is more worrisome than that prevailing in Spain, where the youth unemployment rate is significantly higher but because youth participation in the labour force is higher - see Chart 5). It is a particularly important factor in an environment where the challenges posed by “antisystem” political forces, fuelled largely by the disappointment of people who are not seeing the positive impacts of the economic recovery, figure prominently among the main factors of uncertainty weighing on economic confidence.
Therefore, overall, improvement in the labour market is mixed. If you base the comparison on the situation prevailing prior to the crisis, much more time is certainly needed to return to the levels that existed eight years ago. Regarding some indicators (in particular full-time employment), it is not even certain that pre-crisis levels can be reached during the current cycle given the structural changes in the labour market and demographic trends. Nonetheless, a careful examination of the trends in the last few quarters shows that a clearly positive dynamic has taken hold and is accelerating slightly. This is a fundamental consideration since, in the next few months, the eurozone economy will have to cope with the challenge posed by Brexit (through exports, confidence and, possibly, financial channels). With positive effects on consumer spending, this less depressed labour market looks more and more capable of fuelling a self-perpetuating domestic demand trend that is likely to be healthier and more sustainable than the temporary factors that supported the recovery until recently (a lower euro and lower oil prices). It is (alongside the recent improvement in corporate investment in Germany and France) among the main reasons why we think that the economic recovery in the eurozone may be slowed but not interrupted by the overt political crisis with the United Kingdom.
On the other hand, turning to the outlook for inflation, the improvement in the labour market remains, for now, a factor that is more likely to limit deflationary pressures rather than fuelling genuinely inflationary pressures, which still remain a distant prospect. Wage developments (Chart 6) in fact show the lack of progress in this direction. Germany could be an exception, which may raise significant challenges for both monetary and general policy, but on balance it is unlikely that improvement in the labour market will be a factor likely to prompt the ECB to scale back its unconventional monetary support measures.
1 The differences among these degrees of recovery are mostly due to the fact that the labour force continued to increase during this period.
Unemployment has fallen and is no longer so far from the NAIRU