(Bloomberg) -- The euro-zone jobs market will start conforming to historic norms as the effects of a startling post-pandemic boom dissipate, according to the European Central Bank.
In a report published Monday, researchers attributed much of the recent strength to cyclical factors like falling real wages and quicker inflation. That made it cheaper for firms to retain staff, despite a sluggish economy.
With energy and other input costs down from post-Covid peaks, “this will make the substitution between labour and other inputs less relevant,” they said. “As profits stabilize and demand weakens, the incentive for firms to hoard labor will diminish.”
The labor market is a key ECB focus as jumps in pay stoke inflation. But as consumer-price gains revert to the 2% target, the concern now is that a sudden deterioration could threaten the region’s economic recovery.
The ECB researchers don’t see such a risk, saying surveys “suggest a relatively stable labor market looking ahead.”
Even if it normalizes, however, it’s unlikely to fully revert to it’s pre-pandemic state due to longer-term factors, such as continued reductions in working hours.
“Other structural elements are poised to significantly influence future developments in labor markets,” the report said. “Key among these are the ongoing reallocation of resources and the efforts being made to support a green and digital transition. Furthermore, sociodemographic changes will play a critical role in shaping labor market dynamics.”
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