Unemployment rate in the EU is still unprecedentedly low. Are there any systemic changes in the labour market?


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Apme Fx | Unemployment rate in the EU is still unprecedentedly low. Are there any systemic changes in the labour market?

The unemployment rate in the EU and the Euro Area is the lowest over the last 25year period. We can observe a development which is at least unexpected. The European labour market proved very high resilience, and we can say that neither the covid crisis nor the Russian war against Ukraine (which induced the energy crisis) has hit the labour market in the EU and even in the Euro Area. Is it a miracle or is there any logic explanation of such a phenomenon?

The EU unemployment in April stood at the 6percent level, and the Euro area unemployment rate at 6.4percent level, according the Eurostat data. It is the lowest unemployment rate since the euro has been implemented. What more, the unemployment declined significantly below the level which the EU and Euro area had experienced before the covid crisis.

Some call it the miracle, some believe it is just a cyclical episode which is not sustainable in the long term. For the explanation it is important to look at the labour market in every single EU member state.

First, we have to look at the member states of the southern flank. Perhaps everyone remembers Spain, Greece or Portugal with two-digit unemployment rate. But now, the highest unemployment rate in the EU is in Spain, just slightly below the 12percent level. Greek unemployment reached only 10.8 percent in April, while just ten years ago it was approaching 27percent level. Spain is right the same story, and Portugal very similar.

“These economies have been much less affected by the energy crisis than the industrialised countries of Central and Western Europe, led by Germany. This has led to a convergence of unemployment rates across euro area countries, with unemployment rates falling in the countries with the highest unemployment rate levels, while unemployment in countries at the other end of the spectrum has recently tended to turn towards moderate growth,” Pavla Růžičková of the Czech National Bank wrote.

Second, the Euro area labour market has been going through structural changes. We can say that in some countries there is a huge demand for skilled workers. This situation works like a vacuum cleaner in the labour markets across the EU. At the same time we could observe the acceleration of digitization and robotization which increases the labour productivity, which again increases the demand for labour.

Third, despite the covid, energy and inflation crises the EU (and Euro area) economy did not stick in the deep and long-lasting economic crisis. The GDP in vast majority of EU member states has already broken the pre-covid levels which also induces the demand for labour. We can also say that all the mentioned crises had no economic causes. Actually, they worked as one-off shocks but without any negative long-term impact.

We also cannot forget another important factor: labour force hoarding. Many firms in the EU are willing to keep the labour force even if the production falls. It is mainly due to the relatively high fixed costs of hiring and firing.

So, can the EU enjoy such a low unemployment forever? Probably not. In some industries the demand for labour is stagnating or even falling which signals some future increase of the unemployment rate.

On the other hand, the vacant labour force could be absorbed with firms in other industries. The EU labour market is experiencing relatively fast structural changes of the economy, so it is possible that the unemployment rate will persist on the current low levels for several future months or years.


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