Monetary policy with a labour market of insiders: The ECB from 2020 compared with the ECB from 2008

The COVID crisis has once again shown that the euro-zone labour market is an insider labour market: during recessions, the insiders keep their jobs and wages while the outsiders lose their jobs. The outsiders are the holders of short-term employment contracts, temporary workers, seasonal workers, etc., which has been clearly seen since the start of the COVID crisis. The link with monetary policy is as follows: as the labour market adjusts through unemployment among the outsiders during a recession, the insiders’ wages are hardly affected (in a competitive labour market, a fall in all wages would maintain full employment during recessions) . This means that recessions hardly reduce inflation, and therefore that if the central bank has only an inflation target, it does not react enough. As the euro zone’s labour market is a labour market of insiders, the ECB therefore cannot have merely an inflation target; it must also have a full employment target in order to react enough during recessions. This probably explains the ECB’s muted reaction to the 2008-2009 crisis (it had an inflation target) and its strong reaction to the COVID crisis (it switched to a full employment target as well).