The labour market: Europe’s greatest inflationary pressure of 2024?

With the unemployment and job vacancy rate achieving record figures of a low 6.5% and high 2.9% respectively, Europe’s producers are feeling the pinch of growing unit labour costs.

Post pandemic job recovery has been strong, with expansionary government initiatives supporting economic growth; expansion and overheating that resulted in soaring inflation last year. The subsequent interest rate rises carried out by central banks across the world were expected to plunge the world economy into a recession. A downturn that, until now, has been avoided, leaving the door open for a soft landing. Nevertheless, job demand has been slow to adjust to the growing needs of European suppliers, leaving record levels of positions unfilled and economic growth untapped.

From labour skill shortages to occupational immobility, persistent factors are supporting widespread job vacancy. Most employers are struggling to find apt candidates to fill in roles, driving up the bargaining power of employees: with low unemployment and ample job prospects, employers have to give into the demands of highly skilled workers lest the latter jump ship. This trend is resulting in strong nominal wage growth across all sectors of the economy. The Euroarea is also experiencing a mild regression in labour productivity (at -1.2% overall) that can be attributed to the labour skill shortages.

Coupling this with the energy crisis galvanized by the Russo-Ukrainian war and recent geopolitical tensions in the Middle East and the Red Sea, suppliers are being faced with multiple price pressures – pressures that are passed onto consumers through higher prices.

Though the economy has shown a healthy development from its pandemic-struck lows, cost-push inflationary pressures caused by stagnating productivity and rising unit labour costs are economic indicators to be weary of in the following year. Asymmetric conditions within the Eurosystem adds on to the complexity of the situation: southern European countries such as Portugal, Spain, Greece have – in fact – a low number of vacant jobs, with unemployment soaring in the latter two. Economic developments could hence differ between countries, resulting in similarly differing effect of a single standardized monetary policy.

Correction (January 6th 2024): the slight fall in labour productivity mentioned in the article can be attributed to several complex factors, not (solely) labour skill shortages. Moreover, the rate change may considered to be benign and simply caused by cyclical –ordinary– movements in the economy at large.