Labour shortages are mainly being driven by lower average hours worked

Despite the fact that the eurozone economy has broadly stagnated, job creation remains strong and the eurozone labour market seems to be tighter than ever. The good news is that the unemployment rate has fallen to a historic low of 6.4% on the back of this. At the same time, eurozone enterprises now see labour as the largest supply-side problem hindering their business, and the ECB worries that the tight labour market will keep inflation above target for longer. Clearly, the labour market is one of the most important parts of the economy to watch at the moment.

Strong economic recovery and ageing populations are often cited as the key reasons for labour shortages. What is often overlooked is the lower number of average hours worked per person that has occurred since the pandemic. While the ECB has previously written about it and President Christine Lagarde mentioned it in her Jackson Hole speech, the extent of the impact of this is very large.

The average number of hours worked per person was fairly stable between 2013 and 2019. It experienced a large drop during the pandemic – which was mainly caused by the massive take-up of furlough schemes – but has never fully recovered since. While the recovery is still ongoing, the trend has slowed substantially. This means that more people are needed to do a similar amount of work. At the moment, this equates to 3.8 million more people employed than if everyone was working the average amount of hours they did in the years before the pandemic

The gap in average hours worked amounts to 3.8 million more people in work

This excess of 3.8 million workers equates to about two percentage points of unemployment, adding to a substantial easing of labour shortages. Of course, a lot of people would not have been looking for work in an environment that was not this exceptionally tight, however even using the Abel and Bernanke (2005) Okun’s Law estimate, we find that recent GDP growth should roughly correlate with an unemployment rate of 7.5%. This is by no means high, but it is high enough to not generate meaningful wage pressures, according to the European Commission’s natural unemployment rate estimate.

So, the argument that the current economy is so strong that it causes labour shortages does not really hold up, especially given the fact that total hours worked have only just breached pre-pandemic levels. Ageing populations – which are expected to cause the active population to shrink over time – are also not a reason for current shortages, as the number of people at work and looking for work has never been higher than it is now. The main cause for shortages seems to lie in lower average hours worked.

An Okun's law estimate would currently put eurozone unemployment at 7.5%