The resilience of euro area labour markets to recent economic shocks

Euro area labour markets weathered the COVID-19 crisis without significant scarring effects, in contrast to the aftermath of the global financial crisis. Policies, both at national and EU level, played an important role in keeping companies afloat and in safeguarding employment. In particular, job retention schemes, funded by the EU’s SURE instrument, helped preserve valuable job-worker matches and seem to have supported labour market participation rates before being scaled down by mid-2022 as the economy rebounded. The dynamic recovery from the pandemic-related recession brought about significant labour shortages. This reflected a sudden rebound of labour demand but also a labour supply that was slower to react. Labour market mismatches played only a limited role in labour shortages. The labour market remained resilient also during the 2021-2022 inflationary shock and the ensuing economic slowdown. The resilience of euro area labour markets was mainly due to labour demand holding firm on the back of strong corporate profits and falls in real wages. The recent weakening of economic growth combined with resilient labour market outcomes automatically implied a further weakening of labour productivity dynamics.