How Has Inflation Affected The Job Market Since 2022?
The years since 2022 have been rather turbulent, mostly speared by the Russa-Ukraine war. The war between the two countries has caused supply chain issues, skyrocketed energy prices and led to economic uncertainty. In the face of these challenges, the EU economy has still done surprisingly well, recording a GDP growth of 3.5% in 2022. This is ahead of initial forecasts for the year. One area of the economy that has been hardest hit is the job market. Let’s take a look at the effects inflation has had on employment trends and the labour market.
The EU’s Resilience
The beginning of 2023 saw a historic low unemployment rate of around 6%. This was thanks to the government’s support for both households and businesses. They managed to stabilise energy prices and reduce people’s dependency on Russian fossil fuels. By doing this, employment managed to grow at an annual rate of 2% and the job vacancy rate hit record highs.
The energy price shock, a direct consequence of the war, did constrain job creation in energy-intensive sectors. Thankfully, however, it did not lead to widespread job losses. The emergency support measures at both national and EU levels were able to maintain employment levels.
Labour Market Growth
Employment growth has also been supported by increasing labour market participation. The labour force participation rate resumed its long-term upward trend after a brief dip during the pandemic. This positive trend is particularly noteworthy given the demographic challenges of an ageing population, which usually cause reduced labour market activity. Perhaps surprisingly, the rise in participation rates has been driven by the increased involvement of women, older workers, EU mobile citizens, and non-EU nationals. Labour market reforms and job retention schemes during the pandemic also contributed to a stable employment relationship, boosting participation rates even further.
Wage Growth
Despite this resilience in employment, the labour market has not been immune to inflation pressures. Tight labour market conditions and high inflation have exerted upward pressure on wages. However, such wage growth could not keep up with inflation. In the second quarter of 2023, nominal compensation per employee grew by 6% compared to the same period in 2022. Yet, in real terms, wages decreased by 0.8% due to persistently high inflation. This disparity has negatively impacted households’ purchasing power. This increased both financial distress and social deprivation.
Looking ahead, while nominal wage growth is expected to remain stable, real wages were only anticipated to see moderate increases starting late in 2023. By 2024, real wages were projected to still be below their 2019 levels. This ongoing real wage erosion emphasises the very real social and economic challenges that high inflation causes.
The Impact On Different Sectors
The impact of inflation and economic disruptions has not been uniform across all sectors. Energy-intensive industries, in particular, have seen a slower recovery in employment due to the compounded effects of supply chain disruptions and high energy prices. Nonetheless, emergency support measures have prevented significant job losses even in these vulnerable sectors.
Policy interventions have also played a critical role in cushioning the impact of high inflation. Public transfers, tax reductions, and substantial minimum wage increases have been introduced to support low-income households. These measures have mitigated some of the social impacts of inflation, preventing a more severe crisis akin to the aftermath of the 2008 financial crisis.
What Does The Future Look Like?
There is evidence of resilience. But we can’t let that cloud our judgement of the risks in front of us. A prolonged period of weak economic growth could lead to increased dismissals and higher unemployment. Labour market frictions, such as rising skills mismatches, could also result in less efficient job matching, further complicating the current job market.
In terms of wages, there is room for further wage increases without triggering a wage-price spiral, especially in the services sector. This could help improve the income of minimum wage earners, who are mainly in the services sector. However, the overall process of wage convergence within the EU has stalled in recent years. Perhaps there is a need for targeted policies to promote productivity and ensure that workers benefit from economic gains.
Conclusion
The job market since 2022 has had its ups and downs. While employment levels have remained stable, inflation has had a big impact on real wages. The future of the job market will depend heavily on continued policy support, targeted interventions to promote wage growth and productivity, and measures to address labour market frictions. Time will tell whether EU governments can curate a balanced approach to the turbulent situation they find themselves in.
Author: Mark Ollerton
