Euro area: How tight is the labour market ?

The pandemic has left remarkably few scars o n the euro area labour market. In fact , some indicators of relative labour market tightness are , despite employment not having fully reco v e red , back to their pre-pandemic level. It is these signs of tightness that may be a harbinger for a more lasting rise in wage growth and , ultimately , rising upside risks to the inflation outlook. At least for now, however, these risks still seem rather low: d espite th e quick recovery of the labour market there are no indications of rising wage pressure. The current slowdown in the recovery is likely to further keep a lid on wage growth. That said , it may be possible that structural changes in the supply of labour could lead to a more lasting rise in the wage pressure over the medium-term. Th ese c hange s , however, would need to be quite dramatic, given that there are still many “untapped” source s for employment growth in the euro area. Moreover, there is also the potential that higher wage pressure may lead to an increasing replacement of labour by capital and consequently higher labour productivity.