ECB Says Slow-Declining Labor-Market Slack Poses Wage Hurdle

  • Unemployment-rate recovery masks considerable underutilization
  • ECB estimates broader slack in monthly economic bulletin

On paper, the euro area’s job market is doing much better than it was a few years ago.

In reality, the downturn in the region’s headline unemployment rate masks a worrying trend: Labor-market slack has remained quite high since the start of the recovery, and it’s even increased in some countries. That poses a conundrum for the European Central Bank, which has waited patiently for wages to pick up and feed into its still-subdued inflation metrics.

Prior to the crisis that started a decade ago, labor shortages typically tended to signal rising wage pressure, according to a report in the ECB’s economic bulletin. In its aftermath, low inflation, structural reforms, and changes to wage-setting processes have contributed to a certain decoupling that may suggest the labor market isn’t tight, keeping a lid on wage growth.

The implication is that the euro area’s 9.5 percent unemployment rate -- the lowest since 2009 -- isn’t low enough to trigger wage growth when slack is still “considerable.” The official figure uses a labor-force definition that excludes people who are out of work but competing less actively, as well as those who are employed on a part-time basis but want to work more hours. Adjusting for these and other factors, the ECB says labor-market slack might be closer to 15 percent.

This measure has declined more moderately over the course of the recovery, according to the report, and has continued to rise in countries such as France. Germany is an exception as labor-market slack has seen a significant drop.

“The level of the broader indicator of labor underutilization is still high,” the ECB said. “This is likely to continue to contain wage dynamics.”

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