Standard Life Investments

Weekly Economic Briefing


Reading between the headlines


Eurozone labour markets continue to heal. At the aggregate level, the unemployment rate came in at 9.1% in July, having gradually fallen from a post-crisis high of 12.3% in the summer of 2013. Meanwhile, the other side of the coin – the overall employment level – also reflects this recovery, with the number of people employed having finally risen above the pre-crisis peak in Q1 this year. However, we frequently point out that the aggregate figures in the Eurozone risk overstating the state of play in the individual labour markets. For Germany, the unemployment rate sits much lower than the aggregate at 3.6%; the result of a steady fall in unemployment following only a minor surge in 2008. However, Germany is the exception rather than the rule; for many Eurozone countries, particularly in the periphery, unemployment rates are much higher. Indeed, Spain and Greece remain in recovery mode, with unemployment having peaked at 26% and 27% respectively at the height of the crisis, and still sitting well above the aggregate measure at a chronic 21% and 17%, according to the latest print.

Wasted youth Redefining slack

Headline unemployment rates are not the only game in town. Indeed, it may well be that alternative measures of labour market health can give us an insight into the difficulties facing the Eurozone, both economically and politically. For example, Eurozone youth unemployment sits higher at 18.9%, having fallen only gradually from post-crisis highs of 24.7%. Again, regional disparities emerge; with Italian, Spanish and Greek youth unemployment standing out at 35%, 38.7% and 42.8% respectively (see Chart 6). While this represents an improvement on these member states’ post crisis highs, still-elevated youth unemployment rates are problematic in two ways. Firstly, high youth unemployment can affect future labour market dynamics as young people in the workforce risk becoming discouraged at a time when they should be accumulating skills. This can weigh on future labour market participation and human capital. It can also feed the second risk: political dissatisfaction and Euroscepticism. While trust in the European Union (according to the Eurobarometer survey) has increased as the recovery has progressed, it remains lower than pre-crisis levels. The future of the union requires buy-in from younger voters who will drive the agenda in future.

Also, while unemployment rates have come down substantially alongside the recovery, structural unemployment rates have likely declined too. Structural reforms undertaken across a number of Eurozone member states in the wake of the crisis can help increase labour market efficiency and reduce the structural rate of unemployment in the economy. Indeed, these reforms may be restraining wage growth as they support the supply of labour, reduce collective bargaining and provide greater firm-level wage flexibility. Finally, headline unemployment rates may not be telling the whole labour slack story either. ECB economists have noted that the U6 measure of labour underutilisation – which includes marginally attached and underemployed individuals – provides a more holistic picture of labour market pressures. This is almost double headline unemployment and well above pre-crisis rates, suggesting slack is even greater than appears at first blush (see Chart 7). Given these dynamics, policymakers should tread carefully as they pursue policy normalisation in the new year.

Stephanie Kelly, Political Economist