ECB’s Lagarde: Euro Area Labour Market Unusually Resilient Amid Latest Disinflation

23 August 2025

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Saturday said that the euro area’s labour market had proved unexpectedly robust in the current disinflationary episode.

In opening panel remarks at the annual Economic Policy Symposium in Jackson Hole, Lagarde said past cycles were a poor guide this time. ‘But this cycle has proven to be original in striking ways,’ she said.

Lagarde noted that major central banks had tightened aggressively and that disinflation historically came with an output cost via the so-called sacrifice ratio.

‘Instead, we find ourselves in a very different position from what many expected: in both the euro area and the United States, inflation has fallen sharply, and at a remarkably low cost in terms of employment,’ she said.

‘In fact, in the euro area we have seen the opposite of hysteresis: employment growth has been significantly stronger than historical patterns would have predicted,’ she said.

This was partly due to global factors, she said, citing the easing of supply constraints, a steep drop in energy prices and proactive fiscal policy as helping explain the unusually low sacrifice ratio.

At the same time, domestic factors had also shaped Europe’s performance, she said. ‘First, a delayed wage response to inflation that supported higher employment; second, a reduction in hours worked, driven by labour hoarding and changing preferences; and third, an expansion in labour supply that kept pace with rising demand,’ she said.

Labour hoarding played a role, she said, observing that the ECB’s corresponding indicator had risen to almost 30% in 3Q 2022, almost twice the pre-pandemic average.

On labour supply, Lagarde pointed to demographics and migration. ‘Yet after a brief dip during the lockdowns, the labour force was back to its pre-pandemic level by the end of 2021 – and has since grown by about six million people.’

Looking ahead, Lagarde urged caution. ‘Looking forward, it is difficult to say with confidence whether the patterns of recent years will persist, given the complex interplay of cyclical and structural forces.’

It would be risky to make inferences based on current developments about future sacrifice ratios, she said.

She warned that Europe might avoid unemployment hysteresis at the cost of weaker productivity if reallocation slows and demographics bite.

In conclusion, Lagarde said the labour market had come through shocks ‘in unexpectedly good shape, helped by a mix of global tailwinds and domestic strengths’. But, she added, ‘we should be cautious in assuming that this unique constellation of forces will last.’