Europe’s jobs boom is already at risk and doesn’t need the ECB to kill it off

David Chance

Since the start of 2021, the real value of compensation per employee has declined by around five percentage points, ECB chief economist Philip Lane has noted. Photo: Andrew Harrer/Bloomberg

March 13 2023 02:30 AM

By the end of last year, there were 165 million people with jobs in the eurozone. That’s 165 million reasons to be happy there isn’t a recession taking hold despite surging energy prices and interest rate rises. In Ireland there are more than 2.5 million people now in work and we have come a long way since 2012 when one-in-six of 18-59 year olds here were living in a jobless household.

It is clear already that while the eurozone managed to avoid a downturn last year, one is coming this year. Already domestic demand is shrinking across the bloc and both private consumption and investment is falling, households are saving where they can and not spending.

It doesn’t need the European Central Bank to administer a lethal injection to an already ailing patient. Inflation is driven by food prices, still elevated energy costs and what remains of excess services demand amid the post-pandemic catch up.

To be sure, wages will rise this year, they have to, but to suggest that wage rises are stoking misses the point entirely. The big problem is that despite these strong employment gains there’s been massive erosion of take home pay for so long it has resulted in sharply falling living standards.

Since the start of 2021, the real value of compensation per employee has declined by around five percentage points, ECB chief economist Philip Lane noted.

It doesn’t need the European Central Bank to administer a lethal injection to an already ailing patient

Just as job losses tend to hit the least well off hardest, so does inflation. In Ireland it hits harder than most as the poorest fifth experience a rate of inflation that is 3.92 percentage points above that of the richest, the third largest gap in the eurozone, according to the Bruegel thinktank.

Those sub-inflation payrises are a double whammy for the less-well-off, leaving an ever greater gap between outgoings and income.

The economic spoils are not being divided equally as firms report record-breaking profits and better-off households put away ever more in savings.

Even Germany’s powerful IG Metall union signed up for a sub-inflationary 8.5pc deal over two years in November when eurozone inflation was running at an annual 10.1pc.

We are still operating under the long-lasting effects of Covid on labour demand and for data comparisons – restrictions in Ireland only ended in January of last year. As recently as the first half of 2020, more than 15pc of the eurozone workforce was on some kind of job retention scheme.

The sectors that were hit hardest by Covid had seen the largest increase in wages by the third quarter of 2022

It’s hardly a surprise that the sectors that were hit hardest by Covid – mining, entertainment and accommodation – had seen the largest increase in wages by the third quarter of 2022.

Yet still central banks are telling us that the only tool we have to manage the economy is to turn off the money spigot and, at some stage, the reasoning goes, enough workers will lose their jobs that inflation will subside.

Economists are a very traditional bunch who like to establish patterns based on past behaviour. That means for the likes of Isabel Schnabel, the European Central Bank’s arch hawk, having too many people in jobs is a bad thing.

ECB arch-hawk Isabel Schnabel. Photo: Alex Kraus/Bloomberg

“We have seen marked growth in employment in the fourth quarter. Surveys show that hiring intentions are strong and rising,” she told Bloomberg in a mid-February interview.

Yet it is absurd to fret about wage inflation stoking a re-run of the 1980s. In the US, the labour share of gross value added has declined from 65pc in 1970 to 60pc now. Eurostat data shows labour’s share of economic output stands at 56pc in the EU, down from almost 70pc back in the 1970s.

Isabella Weber of the University of Massachusetts has been looking at the role profits and market power have played in the recent bout of inflation for a while – largely ignored, and sometimes ridiculed for her recommendations.

She notes that as inflation took off from the second quarter of 2021, after-tax profit margins of non-financial US corporations broke a new record and climbed to 13.5pc.

“Yet, until recently it was considered heretical to point to a possible relationship between the first signs of a profit explosion and sharp price increases,” she wrote in a paper this month.

Smurfit Kappa says it has ‘never been in better shape’

In Ireland, we’ve seen building materials giant CRH report a 13pc jump in core earnings to more than €5bn while Smurfit Kappa says it has “never been in better shape”.

It is important to have healthy and profitable firms that are diversified and have the ability and cash reserves to see out a period of rising interest rates, but “never in better shape” will not apply to many small firms any more than it does to household incomes.

It is important to acknowledge monetary policy has large and unequal effects and that there are alternatives.