Eurozone labor supply has largely recovered from the pandemic shocks. This is a remarkable feat by itself, but it also means that there is relatively modest ‘upside’ potential in supply going forward.
Part of the labor market tightness that we have witnessed over the last 1.5 years is likely to be of a transitory nature (reflecting massive labor market transitions). Still, there is also reason to believe that some of this tightness has a more persistent component, especially if firms decide to hoard labor to prevent future hiring problems. Vacancy rates may come down this year, but unemployment may not rise as much, or as quickly.
Workers have found new bargaining powers, albeit largely at the micro level. This highlights the risk that if the current tight labor market situation persists it will likely support a process of rising wage growth. Geo-economics and medium-term trends such as ageing are also conducive to this development.