Very interesting analysis Spyros. It confirms my concern that wage pressures will make the ECB's job harder for longer. It also highlights the need for the Eurozone to reform both its labor market and its immigration framework. Start with the fact that the Eurozone suffers labor scarcity at 6 1/2% unemployment rate, compared to the US's 4%.
Much more interesting and paradoxical: the labor scarcity index in your charts shows a first sharp upward move starting around 2015 - or so, just when Europe started experiencing a strong rise in immigration. This is startling, given that we always hear that Europe needs more immigration to boost the labor force in the face of an aging population.
My impression looking at your chart is: immigration helps boost demand (the lack of demand index keeps dropping), but cannot alleviate labor scarcity because institutional constraints make it hard for immigrants to join the labor force. As a consequence, labor scarcity gets paradoxically worse.
Unless Europe makes it easier for immigrants to integrate in the labor market, immigration will remain a political and social headache with little economic benefit. Would be curious to hear your thoughts here.
Thanks Marco. Absolutely true, we suffer labor scarcity at higher unemployment rates over here, which is probably because our NAIRU is higher on account of labor market and social institutions etc.
The upward move in labor scarcity around 2016 in my view is the result of a cyclical boomlet we had back then as the economy recovered from years of crisis (which Trump eventually aborted with his China tariffs). That boomlet began making scarcity evident.
Great point on immigration, although I think we need to distinguish between asylum and immigration. The increase in scarcity coincides with a surge of refugees from Syria and elsewhere, most of whom were not immediately employable (although by now many have been absorbed in the labor mkt, certainly in Germany). But that was not the cause of the boom, fiscal outlays for refugees are very modest (in fact the German govt for ex. never used up the funds set aside for refugees).
I completely agree that Europe lacks a convincing immigration concept in general. We certainly don't attract enough of the people we need, and are slow to integrate those that arrive.
Very good points Spyros and I think we agree across the board here. Still find it fascinating that it looks like after starting to rise around 2016, labor scarcity seemed to settle on a higher plateau -- but given the Covid disruption in 2020 it's hard to be sure. But again, excellent and very informative analysis, thanks for sharing.
Very interesting analysis and agree that labor scarcity is creating pressure on wages. but are wages the drivers of inflation? You refer to the ECB bulletin and I would need to read to have a better assessment but I would also consider the possibility that wages are just catching up with inflation.
Thank you Gianluca. Certainly in an accounting sense wages are contributing to inflation (in the GDP deflator), still as of Q1 data. Granted wages are catching up with inflation, but that’s still contributing to inflation today and in the near future. In a sense, it’s about the distribution of losses from the terms of trade shock: in a counterfactual world where wages didn’t make up for the losses in purchasing power at all, inflation would presumably be lower and less persistent.
Very interesting analysis Spyros. It confirms my concern that wage pressures will make the ECB's job harder for longer. It also highlights the need for the Eurozone to reform both its labor market and its immigration framework. Start with the fact that the Eurozone suffers labor scarcity at 6 1/2% unemployment rate, compared to the US's 4%.
Much more interesting and paradoxical: the labor scarcity index in your charts shows a first sharp upward move starting around 2015 - or so, just when Europe started experiencing a strong rise in immigration. This is startling, given that we always hear that Europe needs more immigration to boost the labor force in the face of an aging population.
My impression looking at your chart is: immigration helps boost demand (the lack of demand index keeps dropping), but cannot alleviate labor scarcity because institutional constraints make it hard for immigrants to join the labor force. As a consequence, labor scarcity gets paradoxically worse.
Unless Europe makes it easier for immigrants to integrate in the labor market, immigration will remain a political and social headache with little economic benefit. Would be curious to hear your thoughts here.
Thanks Marco. Absolutely true, we suffer labor scarcity at higher unemployment rates over here, which is probably because our NAIRU is higher on account of labor market and social institutions etc.
The upward move in labor scarcity around 2016 in my view is the result of a cyclical boomlet we had back then as the economy recovered from years of crisis (which Trump eventually aborted with his China tariffs). That boomlet began making scarcity evident.
Great point on immigration, although I think we need to distinguish between asylum and immigration. The increase in scarcity coincides with a surge of refugees from Syria and elsewhere, most of whom were not immediately employable (although by now many have been absorbed in the labor mkt, certainly in Germany). But that was not the cause of the boom, fiscal outlays for refugees are very modest (in fact the German govt for ex. never used up the funds set aside for refugees).
I completely agree that Europe lacks a convincing immigration concept in general. We certainly don't attract enough of the people we need, and are slow to integrate those that arrive.
Very good points Spyros and I think we agree across the board here. Still find it fascinating that it looks like after starting to rise around 2016, labor scarcity seemed to settle on a higher plateau -- but given the Covid disruption in 2020 it's hard to be sure. But again, excellent and very informative analysis, thanks for sharing.
Yes, I think the plateau you mention is a combination of at least some degree of mismatch and the beginning of the demographic transition.
Very interesting analysis and agree that labor scarcity is creating pressure on wages. but are wages the drivers of inflation? You refer to the ECB bulletin and I would need to read to have a better assessment but I would also consider the possibility that wages are just catching up with inflation.
Thank you Gianluca. Certainly in an accounting sense wages are contributing to inflation (in the GDP deflator), still as of Q1 data. Granted wages are catching up with inflation, but that’s still contributing to inflation today and in the near future. In a sense, it’s about the distribution of losses from the terms of trade shock: in a counterfactual world where wages didn’t make up for the losses in purchasing power at all, inflation would presumably be lower and less persistent.