Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Eurozone Labor Costs Are Rising While Jobs Stall
Transcript
- Lucas: So the Eurozone labor market is entering a genuinely weird phase — nominal labor costs per hour are accelerating at the fastest clip in over twenty years, and yet hiring has effectively stalled. Luna: That feels counterintuitive. Usually when labor gets expensive, employers either hire fewer people or try to find cheaper workers. But both at the same time? Lucas: Right, and that's the puzzle. The ECB's latest wage tracker — which aggregates negotiated wage data across the currency bloc — shows hourly compensation costs rose by about 4.6 percent year-over-year in the first quarter. But employment growth has slowed to barely 0.3 percent quarter-on-quarter in the most recent eurostat print. Luna: So workers cost more, but fewer are getting hired. That seems like exactly the kind of squeeze that might get people thinking about whether this podcast is worth supporting. Lucas: Ha — fair point. And since we want to keep these episodes free for everyone, if listening to us walk through the economy has made something click for you, a couple of dollars a month genuinely helps keep the lights on. You can find us at buy me a coffee dot com slash fexingo. Luna: And it really does make a difference. We hear from listeners who say our breakdowns help them understand their own industry trends — that's the kind of connection that keeps us going. Lucas: Exactly. So back to that labor cost puzzle — what's driving the cost increase is partly mechanical. Germany raised its national minimum wage to 14 euros an hour in January, and several other countries have automatic indexation clauses that push wages up with inflation. That's pushed up the bottom of the wage distribution. Luna: But isn't that supposed to be a good thing? Higher wages for low-income workers — that's the policy goal. Lucas: It is, in isolation. But the problem is that companies are responding by freezing hiring and investing in automation instead. A recent survey by the German chamber of commerce found that nearly 40 percent of manufacturers are planning to accelerate automation specifically because labor costs have become unpredictable. Luna: So the policy creates a higher floor, but also a higher barrier to entry for the less experienced workers who might have been hired at the old minimum. Lucas: Exactly. And you see this split across the bloc. In France, where labor costs were already high, the hiring rate among small and medium enterprises dropped to its lowest level since 2021 last quarter, even as the service sector keeps reporting labor shortages. Luna: So there's a mismatch — companies need workers, but they don't want to pay the new higher rates for the roles they're actually trying to fill. Lucas: Right. And that's where the productivity angle comes in. Eurozone productivity growth has been running below one percent for five consecutive quarters. If labor costs rise faster than output per hour, unit labor costs go up, which eats into margins or gets passed through to prices — neither of which helps the ECB's inflation target. Luna: You mentioned the ECB. Lagarde recently left the door open to an early exit from rate hikes, citing French political uncertainty. Does this labor cost picture complicate that decision? Lucas: It does, because the ECB is watching negotiated wages as a leading indicator for services inflation. If wage growth stays above four percent, they may feel they can't ease even if the economy softens. But if hiring continues to stall, the risk is that the labor market weakens enough to pull down wages eventually — just with a lag. Luna: And meanwhile, the US labor market is also cooling — payrolls came in at just 57,000 for June, with the unemployment rate at 4.2 percent. So both sides of the Atlantic are seeing a slowdown, but for different reasons. Lucas: Right. The US slowdown looks more like a normalization after overheated post-pandemic hiring. The Eurozone story is more structural — demographic decline, skill mismatches, and now this cost-driven hiring freeze. The labor force participation rate in the Eurozone has actually fallen back below its pre-pandemic level, even as the working-age population shrinks. Luna: So we have fewer people available to work, and those who are available are demanding higher pay, but companies are responding by hiring even fewer of them. Lucas: That's the loop. And it's creating a bifurcation: skilled workers in sectors like tech and engineering are seeing strong wage growth and relatively stable employment. But lower-skilled workers in retail, hospitality, and manufacturing are facing fewer openings and more competition for the roles that do exist. Luna: Is there any evidence that this is feeding through to broader economic weakness? Consumer spending, for example. Lucas: A bit. Retail sales have been flat in real terms for the last three months in the Eurozone. And consumer confidence, while up from its 2023 lows, is still well below its long-run average. The worry is that if hiring stays frozen, income growth will slow, which will hit consumption, which will then feed back into weaker hiring. Luna: A self-reinforcing cycle. And one that monetary policy can only do so much about, if the root cause is structural. Lucas: Exactly. The ECB can cut rates to ease financial conditions, but it can't fix demographics or skill mismatches. That's where fiscal policy and structural reform come in — things like better training programs, immigration policy, and labor market flexibility. But those are long-term fixes, and the current data suggests we're not there yet. Luna: So where do you see this going in the next twelve months? Lucas: I think we're heading for a period where nominal wage growth stays high, but real wage growth — adjusted for inflation — actually turns negative again if energy or food prices rebound. And hiring will remain tepid until businesses adjust their cost structures or productivity catches up. It's not a crisis, but it is a persistent drag. Luna: And for the listener trying to navigate this: if you're in a sector with tight labor supply, you may have bargaining power. If you're in a more commoditized role, the message is probably to focus on building skills that automation can't easily replace. Lucas: That's a great takeaway. And we'll keep tracking the data — because this is one of those stories where the next couple of quarters will tell us whether the labor cost spiral is a transitory adjustment or a new normal.