Eurozone: The employment engine picks up steam but then slows down towards a new equilibrium

In the Euro area, employment growth is expected to remain slow despite an accelerating economic recovery. Future employment will be constrained by demographics and by only modest declines in unemployment, which remains at record lows and close to its long-term natural level. This will prevent wage growth from slowing below pre-pandemic levels.

content of study:

• The pool of unemployed workers is structurally short of suitable candidates, and an ageing population will limit the scope for increased participation absent changes in policies, preferences, and culture. However, productivity recovery and modest increases in hours worked as labor pools are unwound will prevent a significant tightening of the labor market.
• In the short term, nominal wage growth will slow as the inflationary shock dissipates and workers recoup real income losses. But in the medium term, rising demand combined with a less responsive supply will encourage reallocation in the labor market, leading to slower wage growth than pre-pandemic and higher disposable income to support spending. Cost savings from a rebound in productivity will offset the inflationary impact of unrelenting wage growth.
• Risks to the employment outlook are balanced: a disappointing recovery could lead businesses to reassess their expansion prospects and put hiring on hold. Higher-than-expected immigration would support job growth by easing supply-side constraints.