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New research from the European Central Bank helps to shed light on one of the big head scratchers for economists in recent months: disappointing wage growth.
Despite the eurozone boasting its lowest unemployment level in eight years (the headline rate has dropped from a peak of over 12 per cent to 9.5 per cent in April) and more than five million people finding jobs since 2013, upward pressure on wages remains elusive.
Quarterly eurozone wage growth rose by just 1.6 per cent at the end of last year.
Higher wages are a key metric for monetary policymakers as they suggest stronger inflationary dynamics are bedding into the economy as pay packets rise in line with the higher cost of living.
Falling unemployment should, in theory, help push up wages as labour shortages give more bargaining power to workers over employers.
But as the ECB’s latest economic bulletin captures, that relationship between falling joblessness and wage growth looks like it is breaking down. One partial explanation is the high degree of “slack” – or unused capacity – still lurking in the bloc’s labour market.
The ECB’s researchers shed light on the phenomenon of “underemployment” – or workers in part-time work who are seeking more hours. The number of people describing themselves as unemployed has gone up by a million since the bloc’s debt crisis in 2010 to seven million and has failed to decline much despite impressive unemployment gains over the last two years.
According to the ECB’s calculations, the number of people who are without work or would like work (a measure of slack) affects around 18 per cent of the labour market.
“Despite a clear improvement in many labour market indicators, labour markets in most euro area countries – with the notable exception of Germany – appear to still be subject to a considerable degree of underutilisation,” wrote the ECB’s researchers.
The findings chime with research from Bank of America Merrill Lynch, which finds that most the job creation over the last four years in the eurozone has been made up of jobs of “deteriorating quality” (see chart below).
“The near-entirety of the rebound in the headline employment rate since 2013 can be ascribed to ‘lower quality’ jobs”, according to Gilles Moec at BAML. This is usually associated with low-skill, temporary employment marked by the rise of the “gig economy”.
Precarious job security has become a political lightning rod in the eurozone’s largest economies during a key election year. French populist Marine Le Pen campaigned in the recent presidential election on the promise to “repatriate” industrial jobs by reviving manufacturing. Meanwhile, newly elected Emmanuel Macron has already faced a union backlash for his plans to allow French employers to make it easier to hire and fire.
The eurozone’s labour market fortunes also mirror those seen in the US and UK which have been marked by “job rich, wage poor” recoveries since the financial crisis.
Speaking to the Dutch parliament today, ECB president Mario Draghi reassured lawmakers that tepid wage growth would soon be on the up.
He highlighted the impressive work on structural reforms done in some eurozone members, including the likes of Spain, at the depths of the crisis which should now feed into a healthier labour market and lift the lid on salary growth.
“We are confident we should see signs of increase in nominal wages very soon”, said Mr Draghi.