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Low unemployment rates are here again (at least in parts of Europe). Surprise (not): productivity increases, too.

Summary:
It seems that at this moment in time lower unemployment does not lead to higher inflation but to increasing wages, lower profits and increasing productivity. Since 2008, the (European) world has been characterized by high unemployment, a double dip (2008-2013), a historically unprecedented stalling of productivity and low interest rates. This situation seems to be changing. Since 2014, employment is increasing and unemployment is declining. New growth sectors (like ‘information and communication’ and ‘tourism and hospitality’) are thriving. And in countries like Germany, the Czech Republic and Switzerland, the latest (but only the latest) data seem to indicate that productivity is on a roll again – while large swathes of especially these countries at this moment know medium and, more

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Low unemployment rates are here again (at least in parts of Europe). Surprise (not): productivity increases, too.It seems that at this moment in time lower unemployment does not lead to higher inflation but to increasing wages, lower profits and increasing productivity.

Since 2008, the (European) world has been characterized by high unemployment, a double dip (2008-2013), a historically unprecedented stalling of productivity and low interest rates. This situation seems to be changing. Since 2014, employment is increasing and unemployment is declining. New growth sectors (like ‘information and communication’ and ‘tourism and hospitality’) are thriving. And in countries like Germany, the Czech Republic and Switzerland, the latest (but only the latest) data seem to indicate that productivity is on a roll again – while large swathes of especially these countries at this moment know medium and, more important, even low unemployment. Yes, for the first time since 1975 (Czech Republic: since 1990) a large area of Western Europe knows low unemployment, here defined as unemployment below 3,5% (the graph is based upon data for 2016, I used a 3,8% instead of a 3,5% threshold to delineate this area as after 2016 unemployment in this area declined with roughly 0,3 to 0,4%). There is an area consisting of southern and parts of middle Germany, parts of Austria, parts of the Czech Republic and even a small piece of Italy (small as it is, it is important as it indicates that political and legal institutions in Italy do not by definition prevent low unemployment). The low unemployment area is surrounded by regions with medium unemployment (in this blog: 3,5 to 5%), not just in the countries already mentioned but also in Switzerland. Long story short: in a large part of Europe, labour is (as it should) scarce again, a situation exacerbated by the fact that unemployment in countries like Poland, which for a long time served as the natural or at least the designed habitat of a reserve army of labour, is declining, too. There is a demographic-political side to this. One of the reasons for the unemployment difference between France and Germany is the abysmal fertility rate of Germany, which has been far below the replacement rate since 1972. But that does, at this point, not matter. Low unemployment is here again.

Does this, consistent with predictions of economists, lead to high unemployment? It doesn’t. In Germany as well as Switzerland as the Czech Republic inflation is reasonably low and, especially, stable (not really in Switzerland where it increased from minus 1% to about 1% but that’s: low). Even in Iceland, which has known very low unemployment for quite some time and which witnessed a veritable wage explosion, (core) inflation is low. What does happen (according to the most recent data) is that wages are starting to increase while the profit share seems to be declining a bit, for the moment reversing the secular decline of the labor share. Also (but again: these are only the latest data) labor productivity seems to be increasing again, at least in the low unemployment countries. In countries like Germany (and the Netherlands, and whatever) a high flexibility wage restraint ‘beggar thy laborers’ micro-economic policy accompanied by pro-cyclical macro-economic policies has been in place for decades. Fortunately, people like Mario Draghi have softened the monetary part of these policies. Despite this, there will be a shock, laments and hand wringing when the neoliberals awaken to the fact that the world has changed, once again. But they will have to come to grips with the fact that ‘labor’ is about actual people with actual families and actual bills. Or face electoral extinction by populist parties who do acknowledge and to a part even address this fact.

Merijn T. Knibbe
Economic historian, statistician, outdoor guide (coastal mudflats), father, teacher, blogger. Likes De Kift and El Greco. Favorite epoch 1890-1930.

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