By Cary Springfield, International Banker
On October 12, the Organisation for Economic Co-operation and Development (OECD) reported that the employment rate and labour-force rate for the 38-member intergovernmental grouping of advanced economies had reached 70.1 percent and 73.7 percent, respectively, during the second quarter (Q2) of 2023. Both figures stand as the highest recorded since the start of the two series in 2005 and 2008. The OECD unemployment rate in August also remained unmoved at its all-time low of 4.9 percent. Such stellar figures have been reported against precarious economic backdrops for most member nations, prompting many to wonder what underpins the remarkable strength of labour markets across the developed world.
Indeed, several astonishing figures were recorded in the OECD’s Q2 report, not least the employment rates for the quarter being at or within 0.2 percentage points of their record highs for Australia, Austria, the Czech Republic, Finland, France, Germany, Greece, Hungary, Ireland, Israel, Italy, Japan, Korea, Luxembourg, the Netherlands, New Zealand, Portugal, the Slovak Republic, Sweden and Switzerland, as well as the entire OECD, the European Union (EU) and the eurozone. Employment rates exceeded 70 percent in more than two-thirds of OECD countries and declined in just seven OECD countries.
Record-high OECD employment rates were registered for both women and men at 63.2 percent and 77.0 percent, respectively, as were OECD labour-force participation rates for women (66.7 percent) and men (80.9 percent). “High inflation and the resulting pressure it puts on household finances is probably one factor driving the rise in labour participation,” Annabelle Mourougane, the OECD’s head of trade and productivity statistics, explained to the Financial Times (FT).
Europe leads many of these remarkable trends, with the eurozone’s unemployment rate falling to record lows this year. Most member states have or have nearly reached their all-time high employment rates as the recovery from the pandemic-induced recession continues to spur more demand for labour. August saw the seasonally adjusted unemployment rate in the single-currency bloc fall to 6.4 percent from 6.5 percent in July and 6.7 percent in August 2022. And despite having some of the highest unemployment rates in the bloc, Spain, France and Italy have all enjoyed favourable labour-market dynamics in recent months, helping to push unemployment in all three countries lower in August. Meanwhile, the eurozone’s economies at the other end of the scale, with consistently low unemployment rates (such as Germany and the Netherlands), also maintained stable rates for the month.
That said, high youth unemployment remains a distinct sticking point among the stellar labour-market figures in the region. August recorded the unemployment rate of those under 25 at a hefty 13.8 percent, although this was marginally lower than the 13.9 percent recorded in July and well below the 15 percent posted a year ago.
This impressive showing comes despite the pronounced economic headwinds the bloc experienced both last year and this year in the face of negligible gross domestic product (GDP) growth over the last 18 months and annual inflation still running above target at 4.3 percent in September, having reached double digits just a year ago. “Developments in the labour market have been somewhat puzzling. Economic growth has broadly stalled for about a year now, but the job market has continued to thrive,” Bert Colijn, senior economist at ING, noted in early October. “This seems to be the case for a variety of reasons, like strong performance in several sectors, labour hoarding, sick leave and a preference for shorter work hours. Some of these factors do not necessarily behave cyclically, which makes it difficult to get a good handle on how unemployment will develop in the coming quarters.”
Some also point to the marked resilience the eurozone’s labour market has demonstrated for the better part of a decade, outside of the COVID-19 pandemic shock. Others, such as the European Central Bank (ECB), have recently observed that while more people have jobs, they work fewer hours on average. The apex bank for Europe’s single-currency jurisdiction found that between the fourth quarter of 2019 and the fourth quarter of 2022, the number of people in jobs increased by 2.3 percent (meaning that about 3.6 million more people found work during that time), but average hours worked declined by 1.6 percent during this period (equivalent to “around six hours per quarter and person”), with this reduction more pronounced at the onset of the pandemic.
This shortfall in average hours worked relative to employment growth has persisted in 2023. In their June 7, 2023, blog article, ECB economists Oscar Arce, Agostino Consolo, António Dias da Silva and Matthias Mohr identified four key factors explaining this trend:
- Construction and public services worked fewer hours: Although the public-services and construction sectors accounted for the lion’s share of the employment increases—1.5 percentage points out of 2.3 percent, or 65 percent of the overall increase—they comprised only about 30 percent of total employment. But the hours worked did not keep up with the employment growth.
- Labour hoarding: The slowdown in the eurozone economy during the second half of 2022 saw average hours worked stagnating while employment continued to increase. “Firms were reluctant to let workers go despite the economic headwinds, especially skilled employees who would be needed in [the] future,” the ECB economists noted. “Labour hoarding may be rationalised by the current tightness in the labour market, with job vacancy rates at a record high and the unemployment rate at a record low.” Around 29 percent of firms reported labour as a factor limiting production, compared to about 17 percent before the pandemic.
- More workers on sick leave: Although the average hours worked did increase between the second half of 2021 and 2022, unusually high levels of sick leave significantly impacted the euro area. “Various national sources from the four largest euro area countries suggest that sick leave has increased by between 10-30 percent compared to 2021,” according to the economists. “Most cases are temporary sick leave, meaning that employees remain on the payroll of their employers.”
In Germany, the average annual working hours lost to sick leaves increased from 68 to 91 between 2021 and 2022, equivalent to 1.8 percent of the average hours worked in 2022. Similar trends were observed in France, Italy and Spain.
- Secular drivers: The average hours worked in the eurozone have followed a long-term declining trend driven by demographic factors and persistent reallocation of employment across sectors. The authors noted that annual average hours worked had declined by 6.8 percent between 1995 and 2019, from 1,686 to 1,571, with the strong increase in part-time employment accounting for 80 percent of the decline in average hours worked until 2014.
The increased share of women employed accounted for 16 percent of the decline in weekly hours, while a major component of the reduction could also have reflected workers’ preferences, such as increased leisure time.
“Recent evidence from the ECB Consumer Expectations Survey shows that whereas about 20 percent of workers would like to work fewer hours, 35 percent of workers would like to work more,” the ECB economists added. “In addition, while the number of part-time workers who wished to work more hours has declined since 2019, there were still about five million at the end of 2022 of which about 28 percent were low-skilled workers and 43 percent were middle-skilled workers.”
Nonetheless, surveys suggest that labour supply remains restrained in the face of buoyant hiring interest from companies, and many are optimistic that advanced economies can rein in inflation via higher interest rates without inflicting waves of painful job losses. If the labour market remains tight, the resultant upward pressure on wages may also prolong elevated inflation above central banks’ target levels, prompting them to maintain higher interest rates for longer in 2024. Indeed, despite layoffs becoming more frequent and wage growth cooling, “the overall impression is that of a return to normal after an over-exuberant post-pandemic recovery, rather than a material slowdown”, Tamara Basic Vasiljev of the consultancy Oxford Economics recently explained to the Financial Times. “This might make higher-for-longer interest rates necessary.”
ING’s Colijn stated that employment demand will continue to slow. “In services, employment demand still seems to be slightly positive, but in manufacturing, it has fallen to levels that usually indicate stagnation or perhaps declines in employment,” he added in his assessment of the eurozone. “Therefore, we do expect more weakening in the job market in the months ahead. Still, given current shortages, don’t expect a significant turnaround either.”