The European Central Bank published research in its Economic Bulletin analysing why euro area employment remained resilient and unemployment stayed at record lows between 2022 and 2024 despite weak economic growth. It finds that firms’ input substitution towards labour, profit-supported labour hoarding, reduced average hours worked and a rising labour force helped sustain headcount growth, contributing to a marked weakening in labour productivity. From the fourth quarter of 2021 to the second quarter of 2024, cumulative employment growth (3.3%) outpaced cumulative real GDP growth (2.4%), while labour productivity (output per employee) declined cumulatively by 1.3% from the fourth quarter of 2021, with quarter-on-quarter productivity growth around zero or slightly positive since the first quarter of 2024. The unemployment rate stood at 6.3% in September 2024, and the job vacancy rate eased from 3.3% in the second quarter of 2022 to 2.5% in the third quarter of 2024. Labour hoarding is proxied by an ECB indicator based on firms that did not reduce their workforce despite a deterioration in outlook, which fell from 22% in the third quarter of 2023 to 16% in the second quarter of 2024, before a slight pick-up in the third quarter of 2024, still well below a peak of 27.4% in the third quarter of 2022. Average hours worked in the second quarter of 2024 were 1.2% below the fourth quarter of 2019, and the labour force in July 2024 was 8.6 million above January 2020, with women, older workers, tertiary-educated people and foreign workers contributing most. Looking ahead, the article argues that as energy and intermediate input prices normalise, inflation falls and real wages rebound, the incentives for factor substitution and labour hoarding should diminish, bringing employment and output dynamics closer to historical patterns. Survey evidence cited points to moderating employment growth expectations (1% year on year in the third quarter of 2024), while the ECB Survey of Professional Forecasters expects unemployment to remain low and broadly stable (6.5% 12 months ahead and 6.4% five years ahead in the fourth quarter of 2024).
European Central Bank 2025-01-06
European Central Bank research links 2022-24 euro area labour market resilience to labour hoarding, lower real wages and rising participation
The European Central Bank's Economic Bulletin notes euro area employment resilience and low unemployment from 2022 to 2024 despite weak economic growth, due to labour hoarding, input substitution, and a rising labour force. Employment growth outpaced GDP growth, while labour productivity declined. The report anticipates normalising input prices and rebounding real wages will reduce labour hoarding, aligning employment and output dynamics with historical trends.