Central Banks

Monday, October 8, 2012 - 09:00

ECB Sees Need For Major Labour Market Reforms In Eurozone

BERLIN (MNI) - The European Central Bank on Monday stressed the need for major labour market reforms in order to win back competitiveness of Eurozone member states.

In its report "Euro Area Labour Markets And The Crisis" the central bank noted that downward wage rigidities are an impediment to restoring competitiveness particularly in those Eurozone countries that had accumulated external imbalances before the crisis.

"In the presence of high unemployment, a flexible response of wages to labour market conditions should be a key priority, so as to facilitate the necessary sectoral reallocation underpinning employment creation and reductions in unemployment," the report stated.

In this respect, short-time working schemes - although successful in mitigating employment losses in some Eurozone countries in the current crisis - might hinder the reallocation of the labour force from declining sectors towards growing ones if they are maintained for too long, the ECB reasoned.

"Also, in a context of growing mismatch in the labour market, higher wage differentiation across different types of workers and jobs is needed to contribute to a proper matching between labour supply and demand and would particularly benefit some of the groups hardest hit by the crisis," the central bank said.

"Major labour market reforms in euro area countries are essential to foster job creation, bring down unemployment and restore competitiveness, while also lowering the risks of a permanent decrease in potential output growth," the ECB stressed.

A comprehensive reform strategy to increase labour market flexibility is a key ingredient for a solid economic recovery in Eurozone economies with additional positive spillovers on the correction and prevention of macroeconomic imbalances, fiscal consolidation and financial stability, the report said.

"In a monetary union such as the euro area, a flexible and well-functioning labour market provides an economic environment that greatly facilitates the price stability-oriented monetary policy of the ECB," it said.

Reforms which deliver greater flexibility in employment and wages would reduce adjustment costs associated with idiosyncratic shocks and enhance the efficiency and effectiveness of the monetary policy transmission mechanism, the ECB said.

"Relatively limited wage adjustment has been observed in euro area countries despite the severity of the recession," the report observed, though.

The issue of increasing mismatch in Eurozone economies is perhaps one of the biggest challenges facing the labour markets of some member states after the crisis, given the marked increase in long-term unemployment and the persistent downsizing of specific sectors, the central bank pointed out.

"Indeed, the report points to increasing signs of a growing mismatch between worker attributes and job requirements across a number of euro area countries," the ECB said.

--Berlin bureau: +49-30-22 62 05 80; email: twidder@mni-news.com

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