In the euro area, business surveys report record-high staff shortages. They represent a headwind to growth and raise the possibility of faster wage growth and a pick-up in inflation. Thus far, growth of negotiated wages has been subdued but, given its historical relationship with labour market bottlenecks, an acceleration seems likely. Despite the difficulties of companies in filling vacancies, labour market slack has remained above pre-pandemic levels. This situation should improve in the coming months but whether this eases labour market tensions depends on companies’ hiring intentions. Based on recent surveys, these should remain elevated.
EUROZONE: LABOUR SHORTAGE AND GROWTH OF NEGOTIATED WAGESThe strong recovery in the euro area from the pandemic-induced recession has led to the swift reappearance of labour market bottlenecks. In the euro area, business surveys report record levels in terms of staff shortages (chart 1). From a cyclical perspective, this gives rise to two issues[1]. One, it represents a headwind to growth. The balance of opinion of industrial companies reporting “labour” as a limiting factor for their production amounted 23%. Moreover, the balance of opinion for ‘shortage of material’ is more than twice as high (51%, a record) .
FACTORS LIMITING INDUSTRIAL PRODUCTION IN THE EUROZONEIn the services sector, similar trends have been observed. In particular, in the hospitality sector, entreprises have difficulty in recruiting staff after the lockdown period. Also the health care sector is confronted with staff shortages, which already has led to closures of hospital wards. Two, it raises the possibility of faster wage growth that in turn could cause a pick-up in inflation. Such a development should, up to a certain degree, be good news. If sustained, it would enable the ECB to normalise its monetary policy by ending the net purchases of its asset purchase programme and, eventually, raising its policy rates.
Of course, this also depends on the transmission of wage growth into consumer price inflation. In 2017-2018, when the Eurozone business cycle was reaching its cyclical peak, this transmission had been rather limited. For the time being, monetary policy normalisation is a distant prospect considering that growth of negotiated wages[2] remains subdued. “In the second quarter of this year, negotiated wages in the euro area grew at a rate below 2%, more moderately than in the period before the COVID-19 recession, at comparable rates of unemployment.”[3] According to the European Commission, the pandemic may have caused a reduction in the number of new wage agreements but limited wage growth may also reflect the staggered nature of wage contracts, which follow with some delay developments in the labour market. Based on the historical relationship illustrated in chart 1, one would indeed expect a pick-up in wage growth in the coming quarters.
Recent inflation developments may fuel demand for higher wages but a key factor will be whether labour shortages remain elevated. This depends on hiring intentions of companies and the outlook in terms of final demand in the economy –in this respect, the outlook remains favourable judging by the record high employment expectations index of the European industry and services- but also whether vacancies will be filled more easily. At the current juncture, labour market slack remains high. According to Eurostat, in the second quarter of this year, it represented 14.5% of the extended labour force in the EU whereas the pre-pandemic level was about 13%.[4] The European Commission sees different reasons for the coexistence of labour market slack and labour shortages. Vacancy rates tend to respond faster to an upturn in the business cycle. Pandemic-related support measures may temporarily have reduced the incentive for look for a job. Some people may be reluctant to return to work for health risk reasons. One would expect that the influence of these factors will wane in the coming months, leading to an easier filling of vacancies and a decline in the unemployment rate. Another potential explanation is that the “structural labour market mismatch might be on the rise, linked to the sectoral reallocation of labour and an acceleration of changes in the relative skills demand triggered by the COVID-19 shock.”[5]This could give rise to sector-specific rather than economy-wide wage pressures.
