Euro boss: European labor market in good shape

European Central Bank President Lagarde delivered a speech on the labor market at the Jackson Hole Economic Policy Symposium hosted by the Kansas City Fed in Wyoming.

Lagarde noted that major central banks have taken the most aggressive tightening steps of recent times, and that there were understandable concerns initially about how such a rapid and comprehensive adjustment would affect labor markets.

Lagarde stated that historically, disinflation has a cost and there are fears that tightening monetary policy could increase unemployment.

Instead, Lagarde pointed out that the situation is very different from what many expected, saying, "Inflation has fallen sharply in both the euro area and the US, and this has happened at a remarkably low cost in terms of employment."

The labor market is in a good position

"The European labor market has weathered recent shocks unexpectedly well, helped by a combination of global positive tailwinds and local strengths," Lagarde said.

ECB President Lagarde pointed out that by understanding the sources of recent resilience, we can better prepare for the next shock.

Referring to the increase in labor supply, Lagarde stated that, from a purely demographic perspective, Europe's capacity to expand labor supply is limited.

Pointing to the increase in the number and participation rate of foreign workers in the region, Lagarde said, "Foreign workers accounted for half of the growth over the last three years, even though they represented only about 9% of the total workforce in 2022. Without this contribution, labor market conditions would have been tighter and output would have been lower."

Lagarde noted that immigration could, in principle, play an important role in alleviating labour supply shortages in certain regions, but that under all plausible scenarios, even assuming high immigration, the working-age population in the euro area would continue to decline.