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Employment in Europe: a snapshot

In 2010, unemployment, which was on the rise, due to the 2007/8 global financial crisis, started to soar. This was in part, because of  the euro-zone sovereign debt crisis. By 2013, over 25% of the workforces of Greece and Spain were out of work, and 50% of young people. The situation improved and unemployment in Europe has fallen by 40%, from more than 26m in the EU, to just under 16m. This happened even as more women and older people entered the workforce and in total, about 14m new jobs (six percent of total employment) have been added.  

Last year, however, that recovery came to an end. EU unemployment has stuck at the 6.3% mark since May; the euro-area average has been around 7.5%. Job creation, too, has lost momentum. In the first nine months of 2019, employment grew at an average quarterly pace of only 0.2%, half the rate of 2017, when the economy was cruising. Why?

One take is that the labour market has returned to normal as the economy has recovered from the depths of the crisis. Companies soaked up the spare capacity generated by the recession, so that unemployment can’t fall further without stoking wage inflation. But as this spare capacity cannot be easily quantified, economists must search for clues about its extent.

Across the EU, the unemployment rate is now just below where it was in 2008, and the employment rate is actually at a record high. Wage growth is at its highest for a decade. All this is consistent with diminishing spare capacity, but in America and Britain, where the recovery started earlier than in the rest of the EU, economists have been surprised by how low unemployment has fallen. This means unemployment in the EU could fall further.

The explanation fits some countries better than others. It seems apt for central and eastern Europe, where economies are growing rapidly as they catch up with those in the west, but the workforce is shrinking. In the Czech Republic, the unemployment rate is incredibly low, at 2.2% (on par with that of Japan), and wages are rising at an annual rate of 7%. In Germany and the Netherlands, jobless rates are just over 3%, the lowest for decades.

Unemployment rates in France, Italy and Spain are still high compared with before the crisis, suggesting there is still some slack left. Yet these rates too, have stabilised as employment growth has moderated. (Greece, which has the highest unemployment rate in the EU, at 17%, is the exception and here joblessness is continuing to fall sharply). This suggests another reason for flatlining unemployment could be a shortfall in demand. Overall, the EU’s economy has been slowing since 2018, and so bosses may need to take on fewer staff.

The effects of the slowdown on the labour market are most evident in Germany’s manufacturing sector, which has been in recession for over a year. There, employment actually fell in the third quarter of 2019 for the first time in four years. Bosses have also been squeezing workers’ hours: a survey by the ifo Institute for Economic Research found that 8.4% of German manufacturing firms were operating short-time working schemes in December 2019, the highest share since 2010. More than 15% are expected to bring in shorter hours over the next three months.

What happens next will depend on how the economy performs, and whether the slowdown spreads beyond manufacturing, which employs only around 15% of the EU workforce.

Forecasters anticipate the unemployment rate will barely budge: the European Commission, for example, expects the EU rate to drop to no lower than 6.2% by 2021. That assumes the European economy does not slow further; but the bad news continues.

A survey of purchasing managers, released at the beginning of January, suggested that manufacturing activity in Germany was still shrinking in December, and that it had decelerated in France. The longer these problems go on, the more likely it is that employers will become reticent to hire and some may make redundancies.

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