ECB’s Lane: Labour Market Softening in Many Ways

15 March 2024

By Isabel Teles – LONDON (Econostream) – European Central Bank Executive Board member Philip Lane on Friday said that there was evidence showing that the euro area labour market was not as tight as compared to one year ago.

Speaking at the Imperial College Business School in London, England, Lane said the labour market was ‘cooling down’.

‘[V]acancy rates, for example on Indeed, are coming down, and firms are no longer as fearful about labour shortages’, he said. ‘They were saying in ’22, first half of ’23, "It's hard to find workers." Now, if they find it’s hard to find workers, they’re more likely to raise wages. But these numbers are coming down now, so we do think the labour market is softening in many ways.’

Wages interfered directly with inflation if firms passed along the wage increases, he said.

‘So economically, under what conditions do firms, rather than raise prices, say ,"We’re just going to accept lower profits."?’ he asked.

Coming from 2023 with elevated profit margins and feeling the impact of restrictive monetary policy, firms would be able to absorb some of the wage increases into their profits, he said.

‘Directionally, over the course of last year, the contribution of profits got smaller, and we do think there’s some room to go with that’, he said.

Market expectations of inflation were ‘a lot more relaxed’, he said.

‘The market and the asset experts think inflation is going to go back to 2% and as it goes back to 2[%], we remove the restrictions of monetary policy and it settles down at some kind of normal rate, which currently they think it’s around 2%. So if you have 2% policy rate and 2% inflation, that tells you the underlying real interest rate of the economy is expected to be around zero’, he said.