Spring economic forecast: what’s in it for the labour market?

A further revamp of labour markets is advocated by the European Commission (EC)in its spring forecast, especially in the euro area where the prospects for growth are lower than expected. Persistently high levels of unemployment and excessive public and private debt and are the main factors that have contributed to a sluggish economic recovery, the Commission finds.

However, although in most EU countries unemployment remains high, the Commission predicts that all eurozone countries will see unemployment fall. This may be especially the case in countries that have undertaken labour market reforms, such as Cyprus, Ireland, Portugal and Spain. The forecast projects unemployment to fall to 10.3% in 2016 and 9.9% in 2017 in the euro area, and to 8.9% in 2016 and 8.5% in 2017 in the EU as a whole.

The Commission’s forecast projects more people in work, with employment levels rising at an annual rate of around 1% in the coming years. On the downside however, a recent rise in employment levels is attributable mainly to temporary contracts and a reliance on qualification mismatch. These developments particularly affect the younger generations and seasonal work sectors. If the trend persists, labour mobility policy options such as those offered by the EU’s posted workers directive will gain in prominence.

The EC mentions risks that could diminish the share of labour income in GDP, which is already below 50% in the EU on average. These include labour market policy changes, technological change, the diminished influence of trade unions, employment protection, minimum wage legislation and an increase in part-time work.

Inequality in the distribution of personal income is increasing stubbornly, the Commission finds. Germany, although often cited as an economic model, has a particularly unequal income distribution.

The forecast downgrades economic growth, as the region starts to depend more on domestic demand and household consumption on account of a lesser contribution from export income.

The Commission’s forecast is used at the basis for negotiation before budgets are submitted to national parliaments. There will be more to be said about this when the EC presents its country-by-country recommendations at the end of the month.