Euro zone unemployment is higher than official figures suggest and continues to keep wage growth muted, a European Central Bank study showed on Wednesday. This has raising fresh doubts about whether the bank can start rolling back its stimulus measures soon.
Wage growth has been unexpectedly weak for a bloc that is enjoying its best economic run in a decade, and the ECB has argued that better wage dynamics are needed for the inflation rebound to become sustainable, a key condition for cutting back stimulus.
Explaining the apparent disconnect between the rapid unemployment drop and weak growth in pay, the ECB said headline jobless figures exclude people who fail to meet strict statistical criteria and also exclude part-time workers seeking more hours even though both groups add to labour market slack.
Once adjusted for these categories, the labour market slack is around 15 per cent, well above the official 9.5 per cent unemployment rate. Only Germany appears to be displaying signs of labour market tightness.
"In France and Italy broader measures of labour market slack have continued to increase throughout the recovery, while in Spain and in the other euro area economies they have recorded some recent declines, but remain well above pre-crisis estimates," the ECB bulletin article said.
Wage dynamics
“The level of the broader indicator of labour underutilisation is still high, and this is likely to continue to contain wage dynamics.”
Labour market reforms, championed in part by the ECB, has fuelled the rise of part-time work, which has given employers greater flexibility. As a result, companies are hiring more part-time or temporary workers instead of giving current employees more work.
Indeed, part-time and temporary employment has risen by nearly 4 million since the financial crisis even though total employment has not increased, a potential drag on wages.
Critics of the ECB policy argue that solid economic growth and inflation already support the case for lowering stimulus, but the ECB has repeatedly pointed to wages as a source of concern.
The ECB estimates that about 3.5 per cent of the working age population is considered statistically as inactive even though they could rejoin the workforce quickly. Another 3 per cent is underemployed or working fewer hours than they would like to.
Pre-crisis level
That puts the broader slack 3 percentage points above its pre-crisis level, the ECB figures indicate, suggesting that unemployment has some way to fall for significant labour market tightness.
Another headache for the ECB is that the majority of new jobs created are in the services sector, where productivity gains are inherently lower, capping the potential for wage increases. – Reuters
