It’s a question that has begun to exercise the minds of eurozone policymakers: have years of low growth and high unemployment left permanent economic scars on the continent?
Benoît Cœuré, one of the European Central Bank’s most senior officials, weighed into the debate today, arguing the eurozone’s labour market may be suffering from “scratches rather scars”.
One theory doing the rounds – and backed by a report from the European Commission – is that the bloc could fall prey to “hysteresis” – a worrying phenomenon where economic slumps result in permanent economic losses and structurally high rates of unemployment.
Last year, the commission warned of a “vicious cycle” of low growth, weak investment and high unemployment in the eurozone seven years after its debt crisis.
“The projected pace of GDP growth may not be sufficient to prevent the cyclical impact of the crisis from becoming permanent (hysteresis)”, Brussels said in November.
But in a speech in Geneva today, Mr Cœuré suggested this traditional notion of economic destruction has not yet taken grip – pointing to the fact that unemployment has fallen to its lowest level in eight years at 9.5 per cent.
Instead, it is weak wage growth rather than people permanently falling out of the labour market that is of growing concern to policymakers. Call it a “soft” hysteresis if you will.
Or in Mr Cœuré’s words:
The evidence suggests that hysteresis as it is often understood – meaning rising structural unemployment – has not yet materialised meaningfully in our economy.
We see more scratches than we see scars. And unlike “classical” hysteresis, these scratches are currently reducing price pressures, warranting our currently very accommodative monetary policy stance.
The absence of “classical” hysteresis is good news for the eurozone which has been blighted by double-digit unemployment in its weakest economies. Still, the earnings headache is becoming increasingly problematic for European governments facing populist political threats from France to Germany.
Wage growth is also carefully watched by the ECB as a sign of inflationary pressures (read more here). Mr Cœuré’ explains:
Despite a rapid fall in the unemployment rate, wages have remained stubbornly low.
Annual growth in compensation per employee hovered around 1.2 per cent since mid-2014 and only increased to 1.5 per cent at the end of last year – substantially below its historical average of 2 per cent.
Acknowledging the presence of an “anxiety trap”, where political risks and weak demand lead companies to cut back on investment, Mr Cœuré highlights how depressed sentiment may be driving growth in temporary and part-time employment:
Hysteresis may be affecting labour markets through employers’ risk perceptions and subsequent hiring and investment choices, which have so far had the contrary effect of pushing wages down.
But while this form of hysteresis might leave some workers working less than they would like, they remain – by and large – attached to the labour market. And by retaining their professional network and skills, they are less likely to become marginalised and, on aggregate, structural unemployment is less likely to become entrenched.
This is what I mean when I say that the crisis may have caused scratches, but not necessarily scars.