Yet for this to be relevant for inflation, labour shortages would need to be a bottleneck in the economy. While euro area inflation in 2021 and 2022 was driven primarily by supply shocks, services inflation is now the main driver of headline inflation above target. Services companies often cite high wage growth as the main driver of higher selling prices. Labour shortages are therefore a key driver of euro area inflation at the moment, and are of increasing importance, especially as companies have signalled that labour shortages are limiting production, vacancies have hit record highs and unemployment is now at an all-time low. Without immigration, these bottlenecks would be even more severe.
Beyond the euro area level, there are large differences across countries and the drivers of workforce growth. In Germany, the number of nationals in the workforce has fallen by more than 500,000 over the past four years, mainly due to retirements, while the number of foreigners in the workforce has increased by more than 900,000. Without foreigners, Germany's workforce would have decreased rather than increased. Similar trends can be seen in Austria and Portugal. In Spain, both nationals and foreigners contributed significantly to the growth of the workforce, while in the Netherlands and Belgium the impact was rather smaller than that of nationals. Italy and Greece saw a decline in the number of foreigners in the workforce.
Looking at the job vacancy rate as an indicator of whether labour shortages are relevant, we see that labour shortages are a much more pressing issue in the Netherlands, Belgium, Austria and Germany than in, say, Italy or Spain. Across the euro area as a whole, foreigners have contributed to expanding the labour supply, which, according to Jerome Powell's logic, contributes to easing price pressures, or at least wage pressures. This is more pronounced in Germany and Austria than in the other major euro area economies, because they have larger labour shortages and the contribution of foreigners to expanding the labour supply is much larger than in other countries.
