Is mass unemployment coming to an end?

The unemployment rate is low in many European countries, thanks, however, to a decrease in productivity that could become a problem in the near future.

Published On: March 27th, 2023
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Is-mass-unemployment-coming-to-an-end.jpg

Think back a little, to a time not so long ago, when all eyes were riveted to the unemployment figures. It was the political barometer par excellence, scrutinised by all elected officials seeking the votes of their fellow citizens. In France, previous president François Hollande’s five-year term was punctuated by the constant beat of this quasi-existential question: would he manage to fulfil his promise to reverse the unemployment curve? Suspense had reached a peak, but once the answer was “yes”, the issue disappeared from the radar. Unemployment became a non-issue, and despite his success on this front, Hollande didn’t even attempt to run for his own succession, leaving the way clear for Emmanuel Macron.

If no one is worried about unemployment anymore, it’s because the news in Europe is in fact pretty good. “The recovery from the crisis has been largely ‘V-shaped’, and the main labour market performance indicators in July 2022 were at their most positive levels since the beginning of the century,” reports Eurofound . “For perhaps the first time in a generation, labour shortages rather than unemployment – that is, labour supply rather than demand – is the more pressing policy concern.” Unemployment has fallen to 6.7 percent of the labour force in the eurozone, its lowest level in thirty years. The 2020 peak, when economies were under lockdown, is now history. “The COVID crisis has been an extremely fast recession. Rapid declines during lockdowns were followed by steep recoveries,” explains German researcher Enzo Weber of the IAB Institute . Even the effects of the 2008 collapse have evaporated – that is, on average, at the eurozone level. This is not yet the case for the southern European countries, which suffered the full force of the economic shock and the subsequent public debt crisis.

There are still significant differences between countries, particularly between Spain and Greece on the one hand, which still have an unemployment rate over 12 percent, and Poland or the Czech Republic on the other hand, with less than three percent unemployment.

In most countries, the drop is significant. This is especially true among the worst performers in Europe: in Greece (-5.2 points) and Spain (-1.6 points) the unemployment rate has fallen most dramatically between the end of 2019 and the end of 2022. In Italy, the outlook is also encouraging: “Labour demand has returned to pre-pandemic levels, with around 500,000 job vacancies in January 2023, 14 percent higher than in 2019”, confirms Cristina Tajani, President and CEO of Anpal Servizi SPA, the Italian National Agency for Active Labour Market Policies.

More broadly, unemployment is lower today than before the pandemic in 19 of the 27 EU countries, and in 8 other EU countries, the labour market has remained almost stable. Only in Estonia, Latvia, Finland and Croatia has the situation deteriorated significantly.

As for full employment, this is already a reality in 10 Member States, where the unemployment rate is below 5 percent, the threshold generally accepted by economists for awarding this holy grail. The Member States with full employment include Austria, Denmark, Ireland, Germany, the Netherlands, Slovenia and Poland. However, reducing full employment to the unemployment rate alone is too simplistic, as French economist Eric Heyer explains: “for this drop in unemployment to be truly virtuous, it must be accompanied by an increase in the employment rate. If this is not the case, it may mean that a certain number of people, discouraged, have left the labour market, therefore artificially lowering the unemployment rate.” This condition actually seems to be fulfilled in Europe: the fall in unemployment is indeed accompanied by an increased employment rate.

The number of jobs in the European Union is in fact reaching record levels: at the end of 2022, this figure was 3.7 million higher than at the end of 2019, just before the Covid crisis. The employment rate, i.e. the proportion of people employed, is also breaking records, despite a slight dip in the third quarter of 2022: 69.5 percent in September 2022 in the euro area, 1.8 points higher than three years ago, before the Covid crisis.

“You could say we’re approaching full employment,” says French economist Florence Pisani, director of economic research at Candriam. “If we look at the employment rate among the 25-54 age group, i.e. the core of the working age population, it is very high in Germany (86 percent), but this is also true in the rest of the eurozone where it is at its highest (81.2 percent), higher than in 2007, before the financial crisis. The employment rate for 54-65 year olds is much lower, but has been rising steadily, reaching 62.9 percent in the eurozone and 73.8 percent in Germany. The labour market is tight.”

In short, all indicators are in the green, including long-term unemployment and underemployment, both of which are on the decline. What could explain such an alignment of the planets? The first important element is demography. In 2021, the population aged between 15 and 64 years decreased by 0.6 percent in the eurozone and by 0.7 percent in the European Union. This phenomenon is particularly marked in Italy and Slovenia (-1.9 percent), but also in Poland (-1.2 percent), Germany (-0.5 percent) and France (-0.3 percent).

“In the 1980s, the working-age population grew quite strongly, by 0.7 percentage points each year,” explains Eric Heyer. “To bring down the unemployment rate, we had to create more jobs to compensate. With a falling or stagnating population, it is much simpler: fewer jobs have to be created to reduce unemployment.”

In addition to this phenomenon, there is a downward trend in productivity gains. In other words, the amount of work required to produce a good or service is falling less quickly than before. This makes it easier to create jobs: if an employer wants to increase production, she/he cannot rely solely on the increased efficiency of her/his employees, but must increase the workforce by recruiting. Where a proportion of growth was previously absorbed by increased productivity gains, this dynamic has now halted and we now need less growth to require more jobs. “To sum up,” adds Heyer, “we need fewer jobs to reduce unemployment and we need less growth to require more jobs. This means that, overall, we need much less growth to reduce unemployment. And this is true for all European countries.”

Indeed, the strong performance of the labour market contrasts sharply with that of economic activity, which remains sluggish in the eurozone. GDP grew by only 0.1 percent in the last quarter of 2022, after a small 0.3 percent bump in the previous quarter. Most analysts expect eurozone growth to decline in early 2023. This sluggishness has been offset by an even sharper deterioration than before in productivity gains, which have recently turned negative in many European countries.

When productivity not only slows down, but actually falls, the effect is even stronger,” says Eric Heyer. “This is what has allowed us to create a lot of jobs recently”. This observation is shared by economist Patrick Artus. As he explains in a research note : “The decline in labour productivity has the advantage of leading companies to create a lot of jobs to compensate. This is all the more positive because it’s the unemployment rate of the least qualified people that is falling the most, and the employment rate of the least qualified people that is increasing the most, when there is so much job creation.” In the eurozone, the unemployment rate of non-graduates is still twice as high as the average (11.7 percent in the third quarter of 2022), but it has fallen sharply since the end of the pandemic (-3.1 points since the beginning of 2021).

“But this cannot be sustainable,” warns Eric Heyer. “We can’t stay too long with negative productivity gains. We’ll return to positive gains, perhaps lower than before the crisis, but there will still be an increase in the level of productivity.” This is one of the reasons why the OFCE, a French economic research centre, anticipates a return to rising unemployment in 2023 in almost all European countries.

The sudden breakdown in productivity remains a mystery to most economists. In the absence of sufficient hindsight, it is difficult to see clearly, especially when there are several statistical biases. For example, since the Covid crisis, undeclared work has fallen. In order to receive aid during  the pandemic, employers were encouraged to declare all their employees. This suggests that productivity was poorly measured before Covid, and not necessarily that it has decreased. The same is true of posted workers, whose numbers have fallen significantly: when a Polish worker came to France on secondment, he was producing in France, but his employment was not declared in that country. Today, the French worker who has replaced him is no less productive than the Pole, but his employment is registered in France. This distorts comparisons with the pre-crisis period. The sharp rise in the number of apprentices in France has also played a role: these are employees who are less productive than the others, but whose employment has been very heavily subsidised.

“One can imagine that remote work was less effective than expected, that the prophylactic measures put in place by governments to counter the pandemic ended up reducing productivity, or even that work’s meaning evaporated, harming per capita productivity,” says Eric Heyer. “This may have played a role, but in all likelihood it is not what explains the sharp drop in productivity. There are other elements at play that are much more cyclical and that will disappear in the future”. For example, the rise of “zombie companies” as a result of the pandemic, i.e. companies that should have collapsed but which are surviving artificially, thanks in particular to subsidies. This phenomenon can be seen in all developed countries, as the Bank for International Settlements (BIS) has shown. Indeed, there were far fewer business failures during the crisis than at other times. Government support has allowed low value-added companies to survive and thus retain their employees. This retention of labour by companies that should have gone bankrupt reduces productivity, but only in a very cyclical way. “With the repayment of state-guaranteed loans or the cessation of aid, what was supposed to happen in 2021 or 2022 will happen in 2023: gradually, we should see the number of business failures increase,” says Eric Heyer.

Moreover, it is not only zombie companies that retain employees. Companies on firmer ground also prefer to keep their employees, even if they have nothing to do with them for the time being. Why do they do this? Because order books are full to bursting across Europe. Before the crisis, manufacturers estimated that these order books ensured them an average of three months of production. Today this is more like six months. But the companies are not producing, due to supply problems. This is the main obstacle to activity, with recruitment difficulties coming second. But even when unable to produce due to missing parts, they retain their employees. They don’t want to be short of labour when supply chains return to normal.

Another obstacle to productivity is absence rates. “They rose sharply with the health crisis, which is normal, but with the availability of vaccines we expected them to fall back to their pre-crisis level. This is not the case, particularly in France,” says Eric Heyer. Faced with repeated absences, companies have built up a small reserve of replacements, and are not making full use of their workforce.

There are also a lot of resignations, which can take different forms. On the one hand, there is the Anglo-Saxon “Great Resignation”, with workers in the United Kingdom and the United States quitting work for good. In these countries, we see activity rates that are lower than before the crisis. On the other hand, there is the French-style “great rotation”, which is also seen in Spain, where employees also resign, but only in order to find another job elsewhere. However, the high resignation rate is concentrated among new employees: those who have just been hired and walk out a few months later. Employers barely have time to finish training their new recruits before they have already moved on. Some employees understand that the labour market is incredibly tight, and have a clear vision of what they are looking for. If their expectations are not met, they’ll be quick to move on. As a result, employers are forced to spend more time recruiting and training, which lowers productivity. “But these high turnover rates will not last,” says Heyer. “Like many of the factors explaining the loss of productivity, what we are seeing now is not structural. I don’t think that the level of job creation will remain high in the next few years.”

Florence Pisani does not fully share this view. “We’ve seen a breakdown in productivity in all the eurozone countries since 2016, well before the health crisis. It is a more structural problem,” she says. “In reality, there are strong inequalities between companies in terms of productivity. Some companies are very productive, others not at all. Many SMEs are struggling to make any productivity gains. A recent McKinsey study in the United States shows that this is partly a geographical problem: productive companies tend to conglomerate in hubs with all the necessary infrastructure, increasing inequalities between regions.”

The Candriam economist still anticipates a future slowdown in eurozone job creation, which will be accentuated by the ECB’s more restrictive monetary policy. However, unemployment will not necessarily rise, due to the decline in the working age population in Europe, which will become more pronounced.

Italy is a case in point: according to Istat, by 2030 the country’s working-age population will have fallen by 1.98 million people. “Strong macroeconomic uncertainties remain, common to all European countries, such as inflation, changes in raw material costs, national and global GDP,” explains Cristina Tajani. “But in Italy, the major problem remains the demographic decline which, for the first time since the birth rate curve began to fall, is directly impacting the labour market. The Italian peninsula is far from being the only country affected. In Germany, the number of people available on the labour market may fall by more than seven million by 2035, according to calculations by the German institute IAB. In France, according to the latest INSEE projections , the increase in the working population will slow down over the next two decades, before falling sharply from 2040 onwards. “We will still end up with full employment in a few years, but for demographic reasons,” confirms Eric Heyer. “Unless, of course, there are more pension reforms in Europe, as is happening in France.”

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