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Research Briefing | Oct 10, 2023

Eurozone: Is the tight labour market structural? The jury is out

We think the cyclical, temporary factors that are behind the current labour market strength will support a period of strong nominal wage growth. This will gradually make up for the hit to real household incomes.

What you will learn:

  • The combination of high vacancies and low unemployment indicates a very tight labour market. Easing employment expectations should take some steam out of the labour market without unemployment rising sharply.
  • Evidence for structural tightness is mixed. Higher frequency indicators suggest a lower structural unemployment rate, but the rate of improvement is slowing and will likely soon plateau.
  • Labour shortages are hard to reconcile with the recovery of supply. We think they are mostly demand driven. Shortages in industry are easing, but they are still elevated in services as growth in the sector has been surprisingly resilient.
  • Current cyclical tightness will support real wage growth as employees seek compensation for their real income loss. But the persistence of higher prices means real earnings could take several years to recover to their 2021 peak.
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