ECB Insight: Early Signs of Job Market Deterioration Starting to Worry Policymakers

14 October 2024

By Marta Vilar – MADRID (Econostream) – Faster disinflation and weaker economic growth are not the only arguments wielded by European Central Bank Governing Council members in support of a rate cut this week. Cracks in the area’s labour market are also increasingly cited by authorities wanting to ease monetary policy further.

To be sure, the labour market is still going strong by most standards, with unemployment in the euro area at a record low of 6.4% in August. This has not eased the concerns of some policymakers that this rosy picture could quickly darken.

In her speech before EU Parliament on September 30, ECB President Christine Lagarde again flagged signs of weakening labour markets.

The labour market ‘is still solid but showing signs of reduced activity and we see that in the new hires indicators and in the vacancies relative to unemployment’, she said.

New hires dropped by more than 10% from their peak in Q2 2022, according to data published on September 12 by Eurostat. Vacancies relative to unemployment declined from 3.3% in Q2 2022 to 2.6% in the same period of 2024.

Another speech of recent note is that of Executive Board member Isabel Schnabel on October 2, when, somewhat dovishly for her, she pointed to ‘softening labour demand’ as one sign suggesting a ‘more likely’ return to the 2% inflation target.

That same day, Latvijas Banka Governor Mārtiņš Kazāks also joined the club of those worried about employment losing momentum.

In an interview with Econostream, he highlighted the risk of ‘hitting a tipping point at which labour hoarding unwinds’ if the economic recovery were too slow in coming. In that case, shedding labour could become ‘the dominant trend’, he warned.

This could ‘kick off a non-linear adjustment where things happen fast’, he said. ‘We’re not seeing this at the moment, so I'm not saying that tipping point concerns are already materialising. But let's not let it get that far.’

Kazāks is not alone with that concern. The ECB knows that labour markets tend to be persistent in that unemployment is self-perpetuating as people worried about losing their job naturally reduce consumption, thus generating further unemployment.

On the dovish end of the spectrum, Banco de Portugal Governor Mário Centeno has recently pointed to early signs of potentially looming problems facing labour markets.

Observing the decline in the same two indicators Lagarde had mentioned in her EU Parliament speech – new hires and vacancy rates – Centeno on October 2 also cited increasing numbers of recent job leavers in an analysis published on the Portuguese central bank’s website.

‘These numbers are hard to overlook – some flashing more urgent warning signs than others, but all pointing toward a potential reversal in the labour market’, he said.

Beyond statistics, recent news like the announcements of plant closures in Germany by carmaker Volkswagen or of ‘tough’ job cuts by Thyssenkrupp’s steel division further underscore the potential for a serious labour market downturn.

All the same, labour market weakness does not seem to be a source of great concern among Governing Council members yet, even as some indicators suggest a storm could be brewing.

The extent to which this incipient deterioration could accelerate the pace of easing at the ECB is thus uncertain for now.

What is clear is that despite the ECB’s single mandate to maintain price stability, a further slowdown of employment could aggravate the current economic weakness, negatively impacting inflation.

As Sweden’s Riksbank noted only last month when it cut rates, a feeble economy goes hand in hand with the fear of undershooting inflation.