Eurozone: Job gains, wage pains - HSBC

Chris Hare, Economist at HSBC, suggests that Eurozone unemployment could finally fall below pre-crisis levels next year, intensifying calls for the ECB to tighten policy, but in the US and the UK, near-full employment has not fired up wage growth. These examples offer further reason to expect Eurozone wages to remain weak too and as a result, the ECB should be patient, he further adds.

Key Quotes

“The unemployment rate is headed for pre-crisis levels next year

The eurozone unemployment rate has reached 9.1%, down from its 2013 peak of 12%. We think the jobless rate will reach its 8.7% pre-crisis average level early next year a milestone reached in the US and the UK in late-2015. As the eurozone gets closer to 'full employment', this might intensify calls for the ECB to tighten monetary policy.”

“There are three reasons why we expect unemployment to keep on falling

First, we anticipate robust labour demand as the economy benefits from cyclical tailwinds, while productivity remains weak (although we do expect employment growth to slow a little). Second, it appears the rate at which new workers are entering the labour market is softening. With fewer new participants to choose from, firms might increasingly recruit unemployed people. Third, although high immigration levels might raise joblessness in Germany as refugees complete training programmes, this shouldn't have much impact on the overall unemployment rate.

Based on a close look at these assumptions, we have revised down our full-year 2018 eurozone unemployment forecast from 8.7% to 8.4%.”

“But the US and the UK show that lower unemployment ≠ higher wage growth

Despite the return to full employment in other countries, wage growth has been moving sideways. The US and UK experiences show that, even if labour market slack erodes entirely, wage inflation could remain weak. In part this probably reflects a broader global trend. 

Granted, more rigid labour markets and collective bargaining might give eurozone wages more scope to rise than in the UK and the US as full employment approaches.

But conversely, the 'Phillips curve' effect of low unemployment on wages might be even weaker. For example, 'underemployment' might still be a drag on wages. And wage indexation might be embedding low wage growth while inflation remains subdued. On balance, we expect eurozone wage growth to remain muted, supporting our view that the ECB should resist the temptation to tighten policy prematurely.”