- The eurozone unemployment rate has fallen non-stop during the past 4.5 years
- Still, there remains significant slack in the labour market, particularly according to the broader definition of unemployment measured by the U6-indicator
- Employment will need to grow robustly during a considerable period, before the eurozone labour market will start to tighten, implying that wage growth will remain subdued; there will be differences between individual countries though
1. Eurozone unemployment rate has dropped sharply
According to Eurostat data, the unemployment rate in the eurozone has fallen rapidly since early 2013. Nonetheless, at 8.8% in October, it is still well above the levels seen late-2007, when the labour market was tight and wage growth accelerated. The measure used by Eurostat is the standard ILO-definition. It includes the number of people that are without work, but are actively seeking a job and are also available to start working within two weeks. The denominator of the unemployment rate is the active working-age population, which are the people that are employed and the people that are unemployed according to the above definition.
2. Total labour market slack twice as high as unemployment
A broader indicator of labour market slack, the U6-indicator, has recently received a lot of attention in the US and Europe. This definition includes the people that are without work, but who do not meet the ILO-criterion; they are available but not actively seeking or they are actively seeking but not immediately available. On top of that, the U6-indicator includes people that are working part-time, but would like to work more hours, the ‘underemployed’. The denominator in the U6-indicator is the extended labour force, which is the active working-age population plus the unemployed that do not meet the ILO-criterion. This U-6 indicator stood at 18% in 2017Q2.
3. Most slack in the periphery
The U6-indicator for the big-11 eurozone countries up until 2017Q2, shows that most slack is present in the peripheral countries Greece, Spain and Italy. Whereas in Greece and Spain most slack is due to the unemployed, in Italy the largest part the the U-6 indicator is due to other forms of slack. Indeed, in Italy, 11% of the extended labour force are not working, available to start working, but not actively seeking a job. This type of inactivity is often referred to as discouraged workers. They only enter the labour market when the opportunities of finding work have increased. Consequently, a certain level of job growth can go hand in hand with a stable (or even higher) unemployment rate.
4. Wage growth to remain subdued for a considerable time
Comparing the current levels of labour market slack with the pre-crisis levels, it turns out that Germany’s labour market seems tight by all standards. This means that wage growth in Germany should already accelerate in the coming quarters. In contrast, we think that in the eurozone as a whole employment will need to grow robustly during a considerable period, before the labour market will start to tighten. Indeed, we expect labour market slack on aggregate not to be exhausted before around the end of 2019. A sharp acceleration in eurozone wage growth is therefore unlikely before then. However, there might be some upward pressure next year, as higher headline inflation feeds through into higher pay settlements.