MNI INTERVIEW: EU Firms Unlikely To Cut Jobs On Uncertainty

Euro area firms are unlikely to shed workers unless confronted with materially weaker demand, as rising uncertainty does not automatically translate into job cuts, European Central Bank economists Vasco Botelho and Laura Lebastard told an MNI Podcast.

Any change in uncertainty takes time to materialise and has still to be seen in the ECB’s labour hoarding indicator, Botelho said on the podcast, on which the economists gave their own views, which are not necessarily shared with the ECB.

“As long as we are talking about uncertainty without a direct materialisation on the firm's actions, the firm will probably not be proactive and shed labour,” he said.

Lower demand is the main factor that affects labour hoarding decisions, alongside worker shortages, he said, noting that demand can of course be influenced by uncertainty. “Uncertainty, for our purposes as technical economists, ends up being a demand shock,” he added.

With uncertainty rising again over the past year due to trade tensions, companies are probably in a “wait and see” mode, but this is unlikely to materialise in higher unemployment in the short term, the economists said.

DECLINE IN HOARDING

Labour hoarding in the eurozone has declined consistently over the past few years but remains above the levels seen before the pandemic and energy crisis shocks, Lebastard said.

“The labour market is a very slow animal, reacting slowly with massive lags,” meaning that adjustments in employment tend to trail shifts in output and expectations, she said, adding that firms’ decisions to retain staff, even when profits temporarily dip, reflect both operational prudence and the value of accumulated experience and know-how.

Despite the worsening in the economic outlook due to trade tensions between the EU and the U.S last year, European firms have been becoming more optimistic about the outlook as they left behind the effects of previous shocks, Lebastard noted.

In sectorial terms, manufacturing shows slightly higher levels of labour hoarding than services and construction, though the gap is modest, she said.

Manufacturing was hit hardest by the energy shock and faces structural transformation pressures, including demographic turnover, which may reinforce incentives to retain skilled workers, Botelho said.

“Employment dynamics in manufacturing have been decreasing compared to structurally. There has been this structural transformation,” he added.