Europe: Labor Market Changes Revealed by the Beveridge Curve

■ While the eurozone unemployment rate remains low and stable, the job vacancy rate, a reflection of labor demand, continues to decline.  
■ The Beveridge curve may indicate structural changes in the labor market since the COVID-19 pandemic. 
 
  In the eurozone, the downward trend in unemployment and the number of unemployed people, which has persisted since the European debt crisis in the mid-2010s, paused in the second half of 2024. The unemployment rate (August: 6.3%) remains stable at its lowest level since statistics began. Meanwhile, hiring trends, a reflection of labor demand, exhibit a different trend. The quarterly job vacancy rate (April-June period: 2.3%) has gradually declined from its record high of 3.5% in April-June 2022, and is even below pre-pandemic levels. The job vacancy rate is calculated by dividing the number of job vacancies by the sum of the number of employed people and the number of job vacancies. It reflects the proportion of vacancies among the total number of potential workers. Typically, there is an inverse correlation between the unemployment rate and the job vacancy rate, known as the "Beveridge curve." Until the first half of 2022, this relationship remained relatively stable. However, starting in the second half of 2022, while the unemployment rate fell or remained low, the job vacancy rate continued to decline, and the deviation from the Beveridge curve became increasingly pronounced. 

 
The decline in the job vacancy rate indicates a weakening of labor demand. The cumulative decline since the second half of 2022 has exceeded the recessionary periods during the European debt crisis and the COVID-19 pandemic, when the economy experienced two or more consecutive quarters of negative growth. Despite this, the unemployment rate has remained stable, which is believed to be related to a number of structural changes that have occurred since the pandemic. The prevalence of diversified work styles such as working from home and side hustles, the aging population leading to a decrease in skilled manufacturing workers, and the rising cost of new recruitment have combined to lead companies to tolerate a certain degree of redundancy to prevent employee turnover and secure a workforce. Labor adjustments are more reflected in working hours rather than the number of employees hired. Companies have increased their "labor hoarding," dampening fluctuations in both labor demand and supply, thereby contributing to the stabilization of the unemployment rate. 

 
In the Eurozone, the supply and demand mechanisms of the labor market generally lead to a correlation between hiring and wage trends. Changes in "contracted wages" (settled wages), as measured by labor contract statistics, tend to lag the vacancy rate by about a year. Data shows that when the vacancy rate is below the mid-2% range, the year-on-year growth in settled wages remains roughly 2% four quarters later. However, wage growth, which had previously risen to between 4% and 5% between 2023 and 2024, is likely to slow as the vacancy rate declines. The European Commission and the European Central Bank (ECB) forecast that employment will continue to outpace labor force growth through 2026, and the unemployment rate is likely to fall further. Meanwhile, labor demand indicators such as hiring and wages suggest a moderate labor force adjustment is underway. Structural changes in the labor market, through the non-accelerating inflation rate of unemployment (NAIRU), are a key factor influencing estimates of the neutral interest rate. The medium-term trajectory of this trend warrants continued attention.