Productivity is not starting in Europe. This has fallen due to strong employment growth in the midst of economic weakness. However, the European Central Bank believes that this setback will be temporary and that productivity will improve as activity picks up, according to a study prepared by Óscar Arce, current Director of Economics at the ECB, and David Sonderman.
The evolution of productivity has been worse in the euro zone than in the United States since the creation of the single currency, understood as the average production per worker. It improved slightly with the recovery from the pandemic. But it has deteriorated again. The report points out, taking data since 2000, that the main key to the behavior of productivity in Europe has been the economic cycle. When the economy improves, so does productivity. And when it gets worse, productivity suffers too. That is, it maintains procyclical behavior.
The increased use of technology during the pandemic may have contributed to some productivity improvements. But shock energy after the invasion of Ukraine could, on the contrary, have hindered it. Although it remains to be seen how much it will be structural, the factor that has most marked the evolution of productivity has been the accumulation of workers despite economic stagnation. This is what in specialized jargon is called labor hoarding: Companies have been retaining their employees even by producing less because they hope there will be an improvement in business later. Especially if you take into account the context of lack of labor and the cost of firing them and then hiring them again and training them.
The central bank indicates that this is a common practice of companies and that, furthermore, in Europe employment protection has always been preferred over flexibility, which may be further exacerbating this procyclical behavior of productivity. Especially after the employment protection programs that were deployed in all European countries such as ERTE. ECB research confirms that there has been a significant increase in workforce size after the pandemic. This has been the main reason why the relationship between production and workers has deteriorated, concludes the analysis led by Arce, who was previously director of the research service of the Bank of Spain and now chairs the monetary policy committee of the eurosystem. the technical body that advises the governing council of the ECB.
Several elements have fueled the strong pull of the occupation in recent quarters. One of them is the increase in margins in the euro zone in 2022 and 2023. The ECB has found a solid statistical connection between the accumulation of employees and margins: the higher the latter, the better the employment of companies performs. The margins have created the financial space to support jobs, says the Eurobank.
The other cause has been the drop in real wages due to inflation. When prices skyrocketed, salaries fell behind and only began to rebound with a certain delay. This has made labor cheaper and has made it easier to maintain employment. While company income rises with inflation, wages do not increase to the same extent and, consequently, labor costs fall. In turn, this cheapening of labor has stimulated hiring above the pace at which production was advancing, which has undermined productivity.
In addition, companies have fattened their workforce after the pandemic. On the one hand, demand has grown vigorously once the covid passed. On the other hand, companies have anticipated a shortage of workers due to the aging population and lack of qualified labor. At the same time, the percentage of older workers still in the labor market has risen and there have been strong arrivals of immigrants. Faced with the possibility of encountering a shortage of employees, companies have hired a good part of this increase in labor supply despite facing a still weak situation. Companies have accepted lower productivity to cover the risk of not finding workers, the report states.
The average day worked falls
On the other hand, the average working day has registered a drop. Not only because of an increase in sick leave after the coronavirus, but also because many workers have preferred to reduce their hours. And this has probably caused companies to have to hire more to compensate for the fewer hours worked in total: at the end of 2023, the average worker worked about five hours less per quarter than before the pandemic, which is equivalent to nearly two million of full-time employees, reminds the ECB. Compared to 2019, productivity per worker has fallen 0.8% while productivity per hour worked has risen 0.6%.
All of these factors have fueled a buoyant labor market since 2022. And they have amplified the problem of mediocre productivity. But, according to the Eurobank, it does not seem that in the immediate future they will continue to affect with the same intensity. Firstly, business margins are already tightening and are expected to continue falling to absorb the increase in nominal wages, reducing the financial muscle to continue hiring at the same pace. Secondly, as salaries rise, labor costs become more expensive and this should reduce vacancies. Third, the worker shortage is moderating, decreasing the urgency to find workers. And fourth, even if full-time employees want to work fewer hours, that may be offset because part-time employees want to do more. So the trend of working fewer and fewer hours will continue, but probably with a much lower intensity. As a result, the need for more workers to compensate for shorter hours could ease.
For these reasons, the ECB considers it likely that labor productivity will improve beyond what should occur as the economy gradually recovers. In turn, the recovery in productivity should contribute to inflation losing strength and converging towards the 2% objective. With all precautions for the very strong shocks lived in the last four years, these are the hypotheses that underlie the economic forecasts managed by the Eurobank.
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