The Hidden Driver of Labor Shortages in the Eurozone: Average Hours Worked Decline

This is the real reason why the eurozone is suffering from labour shortages

The drop in average hours worked in the eurozone is one of the biggest and somewhat overlooked shocks caused by the Covid-19 pandemic. We think this is the main reason for current labour shortages. This drives down potential output and causes inflationary pressure, which begs the question: can this trend be reversed?

 

Eurozone labour market: at a glance

• Average hours worked per employed person are still 2.2% lower than they were in the pre-pandemic years. This has a very large impact on the labour market.
• We argue that labour shortages are in large part not cyclical or ageing-related, but mostly stem from lower average hours worked per person employed.
• Because of this, 3.8 million people are now in work which would not have been necessary if people worked the same hours they did in the years before the pandemic, and the eurozone would likely not experience meaningful wage pressures.
• This trend in lower average hours worked is observed in most sectors and for both men and women and across all age groups.
• It is hard to fully account for the reasons, but increased sick leave, labour hoarding and some compositional effects, such as the increased entry of women and younger workers into the labour market, seem to be playing a role.
• If there is a rise in the average hours worked, this could mean that labour shortages ease and wage pressures moderate more quickly than expected.
• If average hours worked remain as they are, this lowers growth potential and makes labour shortages and wage pressures more structural.
• Policymakers would benefit from a better understanding of this phenomenon as any further developments in the average hours worked trend will have significant implications for monetary policy, unemployment and economic activity moving forward.