Labour market tightness in the post-COVID-19 era

Abstract

Since 2020, the labour market in advanced economies has shown resilience against successive supply-side shocks. High job vacancy rates and historically low unemployment, despite a recent weakening of economic growth, imply a lower sensitivity of the labour market to changes in the business cycle, underscoring the need to re-evaluate labour market tightness, as it could increase the risks of wage-price spirals and more restrictive monetary policy. Ιn the present paper, we analyse the degree of labour market tightness and its implications for wages, inflation and monetary policy in two large open economies, the US and the euro area, and in a small open economy, Greece, that has undergone substantial labour market reforms, to explore whether post-pandemic labour market developments have common or idiosyncratic features. We find that policy support measures to address the pandemic and the energy crisis have decoupled unemployment from cyclical fluctuations, with the gap narrowing in 2023. Labour market tightness in the post-pandemic era has mainly been driven by a robust increase in labour demand, while labour supply has reverted to or exceeded pre-pandemic levels in the US, the euro area and Greece. Real compensation per employee lags labour productivity levels in all three economies, whereas it remains below its pre-pandemic level in the euro area and Greece. This suggests that the economies in question could tolerate some further catch-up in real wages in the short term without experiencing inflation.