A robust labour market has buoyed euro area resilience through recent economic shocks, but this may be short-lived. Despite significant drops in economic activity during the Covid-19 pandemic and the recent energy crisis, and continued weakness thereafter, employment growth remained robust. This divergence led to a fall in labour productivity as firms hoarded labour, keeping more employees than economic activity warranted.
Rising labour costs is one of the factors that threaten firms’ competitiveness, necessitating future employment adjustments to avoid being priced out of the market. Labour hoarding coupled with structural and persistent low growth could eventually result in increased unemployment, undermining resilience and impacting the economy, public finances, and financial stability – key concerns for the European Stability Mechanism (ESM). (...)
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