Great Euro Zone Solution – And why southern jobs are booming

The Euro Zone Labor Market has been very resilient to economic weaknesses and uncertainty in recent years. The unemployment rate has fallen to the lowest new position, right above 6%. And while things seem to be rather cold when they see the level of emptiness or recruitment plan, lack of permanent labor throughout the Euro zone and seems to be here to stay for some time.

But since 2023, the strength of the Euro zone labor market has seen a striking geographical gap. While the North Eurozone work market has cooled and began to see an increase in unemployment, the South Euro Zone labor market continues to see the decline in unemployment, along with strong work growth. In this note, we dive into the gap.

Divided Recovery: Surprising the Southern Work Market
The difference in the development of unemployment is very striking. Spain, Greece, Portugal and Italy have seen a relatively large decline in unemployment (between -0.8 and -2.6 percentage points since the beginning of 2023), while Germany, the Netherlands, Belgium and Austria have seen their unemployment creeping (up to 0.8ppt in Belgium). A stronger job market is also reflected in job creation.

While the countries of the South Euro Zone continued to see the growth of solid work in the private sector over the past two years, this was completely reduced in the north. In Spain and Italy, for example, the most powerful growth of work has been seen in the wholesale and retail sectors, with construction experiencing the same impact. Professional and scientific services have also emerged as a strong work growth machine. There is no broad sector that has decreased work in Italy, while in Spain, there is a very small decline in finance and agriculture.
The public sector makes the growth of work remain positive in the north

However, in the north, the growth of work in the private sector is very weak. In Germany, manufacturing is really looking at a strong decline in work while construction and professional services have experienced an important decline in work. The French labor market has been a little more than a mixed bag as a wholesale and retail trade and manufacturing adds work, but losses are seen elsewhere in the private sector.

The general theme in northern and southern Europe is a strong increase in the work of the public sector (semi). This has been accompanied by the growth of strong private sector work in the south, while the North has seen (semi) the public sector as the main positive contributor for work growth. This means that the corporation has begun to reduce work in the north, suppressed by high wage growth and weak economic activities.

For the next months, we think this story will survive. When looking at the expectations of work growth for services and industry, the survey shows that job expectations for the south are consistently better than for the north, with the exception of Dutch. Although the Dutch labor market has seen a decline in work in the last quarter, business expectations still show a decent recruitment intention.

New era of labor market convergence
There are several reasons (possible) for striking differences in private sector work, and everything starts with differences in economic momentum. Southern Europe has seen stronger economic growth over the past two years due to Nextgeu, post-Covid booming services in (tourism) and fewer industrial dependence than in the north, which is now also displayed in the labor market. Another reason can be a structural weakness in the manufacturing of countries that influence in northern Europe more than in southern Europe. And, finally, automation and use of artificial intelligence (AI) can be another explanation for the deviation of the development of the labor market.

However, the current euro zone has finally experienced a long-awaited convergence, because the unemployment rate that is higher than the southern countries fell and the low level in the north increases. The convergence is quite positive because so far the southern level has fallen faster than the northern level that has risen. With a lack of labor that seems to be a structural feature of the North Euro zone, it is positive that the market with the highest vacancy is a little cooling while with higher structural unemployment has gained the momentum of the labor market.

Different structural behavior in the euro zone
However, as often happens, the devil is in detail. Not all southern Euro zone countries have seen growth outperforming northern countries. Narratives differ according to the state. The chart below shows scatterplots with the development of productivity and unemployment.

Countries in the upper left quadrant, such as Spain and Greece, have seen the growth of strong work accompanied by productivity profits. This is the healthiest situation from an economic perspective because it increases domestic demand in the short term and helps the benefits of long -term efficiency in the economy. The upper right quadrant has seen the loss of jobs that come with productivity profits, especially for countries with strict labor markets. This shows that businesses increase efficiency because the labor market remains tight and wages have increased significantly, and came behind the labor accumulation period and sagging productivity after pandemic.

Half the bottom of the graph shows countries that experience weak productivity performance. In Italy, this came with a strong decrease in unemployment. Business relies more on workers for output. For the short term this is positive because it increases the Italian household income, but given the weak demographic profile, the question remains whether this is sustainable. The lower right quadrant, including Austria and with Germany close, see an increase in unemployment and weakened productivity. This is basically a sign of a weak cycle performance.

Euro zone labor market convergence facilitates trade-off policy
While the development of the underlying labor market is different according to the state, the development of positive aggregates from the perspective of a single labor market. There is a clear convergence in terms of unemployment, with the biggest steps coming from countries that reduce high unemployment. Countries with a structural strict labor market experience a number of easing, which is far from resulting in an increase in structural unemployment. One decade ago, after the Euro crisis, we hope for developments like this.

Overall, the euro zone finally experienced a long-awaited convergence. This is partly due to economic weaknesses in the north, but partly due to direct power in the south. This convergence can be another important reason for the spread of relatively narrow government bonds in the Euro zone and must also make the life of the European central bank easier. In the past, one -size monetary policy for all ECBs quickly reached the limit due to different economic trends throughout the Euro zone. With the current convergence and monetary policy on the threshold to be accommodative, a new convergence is a blessing – it can bring assistance because of the suffering of the northern economy, without doing damage in the south.
Source: Ing