Thursday, September 22, 2016

EU - The employment-GDP relationship since the crisis The continued employment growth seen across the euro area since the onset of the recovery in 2013 has been stronger than expected... - ECB

Publication - The employment-GDP relationship since the crisis


The employment-GDP relationship since the crisis


 The continued employment growth seen across the euro area since the onset of the recovery in 2013 has been stronger than expected. Differences in the responsiveness of employment growth to GDP growth between the pre- and postcrisis periods suggest a possible structural change in the underlying employmentGDP relationship. This article explores the factors driving the employment-GDP relationship. It suggests that the changing sectoral composition of GDP growth towards a larger services sector, a shift in the composition of employment towards part-time employment, and structural labour market reforms and fiscal measures in some countries underlie some strengthening in the underlying employment-GDP relationship since the start of the recovery.

 The relationship between euro area employment and GDP

 The recovery in euro area GDP since the second quarter of 2013 has been accompanied by higher than expected employment growth. This article assesses the extent to which the stronger than expected employment growth seen over the recovery is likely to persist and examines some of the factors likely to be contributing to this. From a central bank perspective, this topic is important because the labour market recovery is crucial for the strength of confidence and consumption in the aftermath of the crisis. While the earlier weakening of the relationship between GDP growth and the unemployment rate (Okun’s law), or between GDP and employment growth, has been documented and explained in the literature1 , much less attention has, so far, been paid to the strong “reconnection” between employment and GDP growth over the recovery.


 To some extent, it is surprising that the employment-GDP relationship over the recovery has been as strong as in the pre-crisis years. 

Before the onset of the Great Recession in 2008, euro area employment growth co-moved closely with GDP. In retrospect, however, the strong employment growth experienced in some countries in the pre-crisis period had been associated with the emergence of sectoral imbalances, which were later viewed as unsustainable in the longer term. Nevertheless, since the onset of the euro area recovery in GDP, employment responses to GDP growth have been at least as strong as in the pre-crisis period. Both cyclical and structural changes are likely to have contributed to the higher than expected responsiveness of euro area employment to GDP since the rebound. The cyclical reasons include strong rebounds following large decreases in employment in some countries and the introduction of short-term fiscal measures, which have boosted employment growth in the aftermath of the crisis in some Member States. However, ongoing structural changes and structural reforms in some countries are also likely to have played a more persistent role.2

 This article considers the factors underlying the employment-GDP relationship and assesses their role in explaining the strong employment growth observed since the start of the euro area recovery.

 The remainder of this article is organised as follows: Section 2 provides an overview of euro area employment-GDP dynamics over the course of Economic and Monetary Union (EMU), focusing on developments since the crisis. Section 3 provides a quantification of the employment-GDP relationship and includes a box examining the evidence of changing employment dynamics from a statistical perspective. Section 4 assesses the importance of sectoral dynamics in explaining the recent strength in the employment-GDP relationship. 

A second box compares the patterns observed in the euro area with those seen in the United States since the Great Recession and considers the implications of recent strong employment growth in both economies for productivity measurement. Section 5 examines the country dimension of the euro area aggregate and assesses the role of policy measures in shaping recent euro area developments. A third box examines the impact of structural reforms on country-level changes in employment reactions to output growth. Section 6 concludes.


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