Two Scenarios: Implications of Average Hours Worked in the Eurozone

Two different outcomes are possible, both with significant implications

Since we don’t fully understand the workings of this, it’s hard to say what comes next. But both a recovery to the previous level of average hours worked per person and a stabilisation at the current level have serious implications for the eurozone economy, businesses and the European Central Bank.

If it turns out that the recovery in average hours worked per person regains speed, the coming years will probably see easing labour shortages, but also higher trending unemployment as fewer people will be needed to reach the same hours worked. This would relieve wage pressures substantially. In turn, this would dampen overall household income and consumption, but it would not necessarily be triggered by any regular cyclical development. It means that the labour market would become less tight without a macroeconomic event causing it.

If a recovery in average hours worked were to happen, it is very likely that most forecasters are underestimating this as it is something that models do not pick up on. That makes it likely that the ECB staff's macro projections – currently expecting a further drop in unemployment over the coming years – do not take these possible developments into account.

If the average hours worked per person do not recover meaningfully from here, this means that there has been a permanent shift lower in total labour supply. This results in more permanent labour shortages and quicker wage pressures – like we are already seeing now – and therefore means that monetary policy should remain tighter compared to a situation where average hours worked are higher. Overall, the average output per worker being reduced means that potential output will be driven down at a time when demographic forces will start shrinking the labour force. A prospect that lowers GDP growth expectations for the medium term.

Both possible outcomes will have profound implications for understanding the post-pandemic eurozone economy. It is therefore imperative that we gain a better understanding of what drives the downturn in average hours worked per person more precisely.