No quick wins: more jobs but little productivity in the Eurozone

  • The crisis-related damage to labor markets has not been as bad as expected amid changing consumer preferences and spending behavior. Employment has increased by 2.3% relative to pre-crisis levels, especially in France and Spain. However, the slow reallocation of labor in the Eurozone has resulted in sluggish productivity growth amid record low unemployment (6.6% in January 2023) as labor markets adjusted via reduced working hours rather than layoffs. Limited productivity gains will hamper a more meaningful recovery, especially in countries and regions with limited labor-market flexibility and a shrinking workforce.
  • The decline in productivity varies significantly across countries due to differences in labor supply and corporate hiring practices. Italy has seen remarkable productivity growth due to labor scarcity, while other Eurozone economies lag behind. In France and Spain, labor participation and/or job creation have increased sharply, discouraging companies from increasing the efficiency of production and investment. Since companies are increasingly aware that labor is becoming a limiting factor amid deteriorating demographic trends, “labor-hoarding” has also weighed on productivity.  
  • Labor scarcity and high inflation has resulted in sustained wage pressures. Wages have also evolved differently across countries, reflecting structural differences of bargaining and collective agreements. Wage pressures have been somewhat higher in Germany, where rising labor market participation has not helped ease scarcity of workers in several sectors, including construction. Across the largest Eurozone economies, we expect wages to increase by 4-5% this year, followed by 3.5-4.0% next year. While well-anchored inflation expectations suggest that the risk of an adverse price-wage spiral remains small, it cannot be ruled out.
  • Labor-market policies will need to operate in an environment of exceptional uncertainty shaped by both cyclical pressures and secular challenges. To address the cyclical pressures, policies need to be aimed at adjusting crisis-support measures to encourage a more flexible labor market while protecting the vulnerable. At the same time, structural pressures due to automation and digitalization are becoming more prominent. Active labor market policies should facilitate job-to-job transitions through higher labor and product-market efficiency as well as re-/upskilling, supported by continuous learning programs and changing hiring practices by firms. This could also require public support to incentivize hiring/mobility, ideally in combination with a re-thinking of social protection, including for ‘gig’ workers and to those who lose their jobs or need transition assistance, and educational reforms that help build skills for the workforce of the future.
Patricia Pelayo Romero
Allianz SE
Maddalena Martini
Allianz SE Branch Rome
Maxime Darmet
Allianz Trade
Roberta Fortes
Allianz Trade