CONCLUSION

In spite of growth resuming and inflation picking up, compensations per employee continued to grow at a moderate rate in 2010 in most of EU countries, reflecting the protracted labour market slack.

Reductions in nominal compensation per employee were recorded in 2010 in the three Baltics, Greece, Ireland, Malta and Hungary, largely as a result of salary cuts in the public sector. Sustained nominal

European Commission

Labour Market Developments in Europe, 2011

wage increases were instead registered in Bulgaria, Poland, Slovenia, the UK, Cyprus, the Czech Republic.

In light of rising inflation compared with 2009, real compensations per employee fell in 13 EU countries and real unit labour costs fell in most Member States. The fact that real wage growth was moderate in comparison with productivity would in principle help reducing unemployment. In general, the degree of adjustment in real unit labour costs reflects the magnitude of unemployment. However, while in some high unemployment countries the adjustment was comparatively strong (the Baltics), in others it was weaker than that recorded in some countries with low unemployment (Spain, Slovakia, Ireland).

The remarkable productivity improvement, coupled with wage moderation, resulted in a reduction in unit labour costs which appear to be consistent with the external rebalancing of EU economies: the competitiveness gains were in general more marked in countries with larger current account deficits.

in 2011 and 2012. Despite persisting risk factors relating inter-alia to tensions in sovereign bond markets, credit supply, and inflationary pressures in emerging economies, private domestic demand is gradually gathering pace, and economic growth becoming increasingly self-sustaining. Hard data confirm that the recovery is broadening not only across countries but also across sectors. According to the Spring 2011 Commission Services Forecast, EU GDP is expected to expand by 1.8% in 2011 and by 1.9% in 2012. In the euro area, economic expansion is likely to edge up from 1.6% in 2011 to 1.8% in 2012. All in all, in spite of demand resuming and output gaps narrowing, the recovery appears more muted compared with previous episodes of growth after major recessions.

Growth patterns are expected to remain highly different across countries in 2010, reflecting individual challenges policies pursued. Estonia, Lithuania, Luxembourg, Poland and Sweden will register a momentum twice as high as the EU average. Spain and Ireland are expected to register GDP growth well below that of the EU average. In Greece and Portugal economic activity is forecast to contract again in 2011, amid the ongoing fiscal consolidation. In 2012, GDP growth is instead expected to gain momentum in most of the EU Member States.

EU labour market conditions stabilized in the course of 2010 and have recently started improving. Employment in the EU rose since mid- 2010, while the unemployment rate remained broadly unchanged at the level of 2009, just above 9.5% in the EU and 10% in the euro area. Taking into account the slightly positive carry-over from 2010, employment is expected to grow by 0.5% in 2011 and to gradually speed-up to 0.7% in 2012 both in the EU and the euro area. The unemployment rate in the EU is expected to steadily retrench over the forecast horizon, declining to 9.5% and 9.1% in 2011 and 2012, respectively. For the euro area, unemployment forecasts are less optimistic (10% and 9.6% respectively in 2011 and 2012). As discussed in Chapter 1, the EU unemployment response to growth is moving back to normal values, after the period of exceptional employment resilience

and early 2010. Indeed, the adjustment on the intensive margin appears complete, and hours worked per employee have stopped growing. The expected relatively muted unemployment recovery is therefore expected to be mostly the result of the lacklustre growth, the usual lags with which employment adjusts to economic activity and highly resilient participation rates.

One of the reasons that may have held back the employment recovery in 2010 is the pending uncertainty on the growth outlook, which may have induced a wait-and-see attitude on the part of firms. As revealed by Graph I.4.1, employment growth in 2010 was much below what predicted on the basis of business sentiment, as proxied by the Business Climate Indicator.

Graph I.4.1: Business climate indicator and employment growth in the EU (2000Q1-2011Q1) 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q32010Q4 2011Q1 y = 0.0248x + 0.2988 -1.0 -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 -40 -30 -20 -10 0 10

Business climate indicator

E m pl o y m e n t gr o w th ( q ua rt er ly )

(1) Business climate indicator of the monthly business survey in Industry

Source: ECFIN.

The reason could be that growth was perceived as more uncertain. The fact that job creation in 2010 took place especially in terms of temporary and part-time jobs surrogates the argument that uncertainty on the economic outlook played a role. Looking forward, as the economic recovery consolidates and uncertainty evaporates the employment recovery would gather momentum. Recent information from sentiment indicators supports the views that the recovery in employment is on its way. In particular, surveys of

European Commission

Labour Market Developments in Europe, 2011

employment expectations were back or above their pre-crisis levels in all sectors at the end of the year, except in the construction industry (Graph I.4.2). The euro area PMIs for employment expectations also point towards positive employment growth.

Graph I.4.2: Employment expectations in the EU business surveys (industry, construction and services)

-50 -40 -30 -20 -10 0 10 20 2005 2006 2007 2008 2009 2010 2011 Industry Construction Services

Source: European Commission.

A key question is the speed at which the incipient employment recovery will bring back unemployment rates to pre-crisis levels. The recent shifts in the Beveridge curve signalling a worsening labour matching (chapter 1) and the forecast increase in the

NAIRU for 2011 and 2012 (reaching 9.1 and 9.2% in the euro area and 8.6% and 8.8% in the EU, respectively, according the Spring 2011 Commission Forecast) suggest that the unemployment rate will persist above pre-crisis expected to retrench over the forecast horizon. On average, it will reach 10% in 2011 and then 9.7% in 2012 in the euro area (respectively 9.5% and 9.1% for the EU).

Employment and unemployment evolutions will continue to be much differentiated across Member States in 2011 and 2012 (Table I.4.1). After declining in most of the EU member states in 2010, employment will resume growing in almost all EU countries in 2011 and in all but Portugal in 2012. Although the unemployment rate is declining in most EU countries over the forecast horizon, the prospects remain poor in a number of countries whose labour markets were strongly hit by the crisis and its repercussions to the financial and government sector. This is notably the case of Greece, Ireland, Spain, Portugal. There will be considerable improvements in the Baltic countries, but unemployment rates will remain well above pre-crisis levels. The prospects for unemployment reduction appear also substantial in Germany and Sweden and Finland.

Table I.4.1: Employment growth and unemployment rate forecasts by EU Commission (DG ECFIN), OECD and IMF

2010 2011 2012 2011 2012 2011 2012 2010 2011 2012 2011 2012 2011 2012 BE 0.7 0.8 0.7 0.8 0.9 0.7 0.9 8.3 7.9 7.8 7.6 7.3 8.4 8.2 BG -5.9 0.5 1.0 10.2 9.4 8.5 8.0 6.7 CZ -0.8 0.0 0.0 0.7 0.7 7.3 6.8 6.4 6.6 6.3 7.1 6.9 DK -2.1 0.2 0.4 0.0 1.1 7.4 7.1 6.7 7.2 6.4 4.5 4.4 DE 0.5 0.9 0.5 1.0 0.6 0.5 0.2 7.1 6.4 6.0 6.0 5.4 6.6 6.5 EE -4.8 4.2 1.3 3.2 1.6 16.9 13.0 11.5 14.2 13.0 14.8 12.8 IE -4.1 -1.5 0.4 -2.4 -0.6 -1.5 1.5 13.7 14.6 14.0 14.7 14.6 14.5 13.3 EL -2.1 -2.6 0.1 -3.7 -0.3 -2.4 -0.1 12.6 15.2 15.3 16.0 16.4 14.8 15.0 ES -2.4 -0.6 0.9 -0.7 0.9 0.3 1.0 20.1 20.6 20.2 20.3 19.3 19.4 18.2 FR 0.1 0.8 0.9 0.6 1.0 0.0 0.6 9.7 9.5 9.2 9.0 8.7 9.5 9.1 IT -0.7 0.4 0.9 0.4 0.8 0.3 0.7 8.4 8.4 8.2 8.4 8.1 8.6 8.3 CY -0.3 0.2 0.8 1.0 1.0 6.5 6.3 5.6 6.5 6.3 LV -4.8 1.5 1.7 18.7 17.2 15.8 17.2 15.5 LT -5.1 2.1 2.8 17.8 15.5 12.7 16.0 14.0 LU 1.6 2.1 2.3 2.2 2.0 1.8 1.8 4.5 4.4 4.2 5.4 4.8 5.9 5.8 HU 0.2 0.4 3.0 -0.2 1.0 11.2 11.0 9.3 11.5 11.0 11.5 10.9 MT 2.2 1.3 1.4 1.2 1.2 6.8 6.8 6.7 6.5 6.4 NL -0.6 0.5 0.7 0.6 0.7 -0.2 0.2 4.5 4.2 4.0 4.2 4.0 4.4 4.4 AT 1.0 0.8 0.7 1.4 0.7 0.3 0.3 4.4 4.3 4.2 4.2 4.0 4.3 4.3 PL 0.4 1.1 1.0 0.7 1.2 9.6 9.3 8.8 9.4 8.5 9.0 8.7 PT -1.5 -1.5 -0.9 -1.5 -1.3 -0.8 -0.7 11.0 12.3 13.0 11.7 12.7 11.9 12.4 RO -1.8 0.1 0.6 7.3 7.2 6.8 6.6 5.8 SI -2.2 -1.3 0.3 -0.3 0.4 7.3 8.2 8.0 7.5 7.2 SK -1.4 0.6 0.9 0.9 1.0 1.9 1.6 14.4 14.0 13.3 13.8 12.8 13.3 12.1 FI -0.4 0.9 0.7 0.7 0.5 0.8 0.7 8.4 7.9 7.4 7.9 7.1 8.0 7.8 SE 1.1 1.9 1.1 2.3 1.2 8.4 7.6 7.2 7.5 7.0 7.4 6.6 UK 0.2 0.4 0.5 0.5 0.2 0.6 0.7 7.8 8.0 7.8 8.1 8.3 7.8 7.9 EA-16 -0.5 0.4 0.7 0.3 0.5 10.1 10.0 9.7 9.7 9.3 9.9 9.6 EU-27 -0.5 0.4 0.7 9.6 9.5 9.1 na na US -0.6 0.8 1.3 0.9 1.9 2.1 2.3 9.6 8.7 8.1 8.8 7.9 8.5 7.7 JP -0.6 -0.2 0.1 0.0 -0.2 -0.2 -0.4 5.1 4.9 4.8 4.8 4.6 4.9 4.6

Employment (annual percentage change) Unemployment (percentage of civilian labour force) ECFIN OECD IMF ECFIN OECD IMF

Source: EU Commission Spring 2011 forecast, IMF World Economic Outlook database April 2011, OECD Economic Outlook n°89 June 2011. The OECD does not publish economic forecasts for BG, CY, LV, LT, MT, SE and the EU27 aggregate. For the euro area by OECD, 15 countries are considered (no Cyprus and no Malta).

The differences in the forecast unemployment dynamics across countries are mostly linked to the multi-speed recovery, however, in some cases, the unemployment response to growth response is also forecast to differ considerably (Graph I.4.3). While in countries where the recession hit first like the Baltic countries the rebound in unemployment is expected to be large in proportion to GDP growth (in light of adjustment of hours worked having come to an end), in Ireland the unemployment rate is forecast to rise in 2011 in spite of positive growth.

Graph I.4.4: Nominal compensation per employee in EU Member States -2 3 8 13 18 23 -2 -1 0 1 2 3 4 5 6 7 8 EL IE PT ES IT MT LU FR SI AT DE FI NL BE CY SK EE LV HU DK SE UK CZ LT _RO PL BG 2011 2012 unemployment rate 2010 %

Source: Commission Spring forecast.

In line with resuming economic growth and rising inflation in 2011, the growth rate of compensation per employee is expected to gradually accelerate in 2011 and 2012 in the euro area to 2.1% and 2.3% respectively (for the EU 2.3% and 2.7%). Wages growth would still be dampened by the continued

weakness of labour market. Consistently, real wages are expected to decelerate and to grow below productivity; in 2011 and 2012 real product wages are expected to growth in the euro area at about 0.7% both years (for the EU 0.7% and 0.9%) against a productivity growth of 1.2% and 1% for (1.4% both years for the EU). Although the extent of wage moderation will in general reflect labour market slack, the adjustment is expected to be sluggish in Malta, Slovenia, Estonia, Slovakia, Lithuania, Poland and Bulgaria (Graph I.4.4).

Graph I.4.5: Nominal unit labour costs in the euro area

-3 -2 -1 0 1 2 3 4 5 6 E L IE L V E S P T FR CZ IT E E DK SI DE N L S K CY _BE HU RO L U LT BG 2011 2012 %

Source: Commission Spring forecasts.

The pick up in compensation per employee of 2011 and 2012 will translate in an increase of unit labour costs for the euro area, partly offset by the increase in productivity, of 0.8% and 1.2% respectively. The strongest dynamics is expected in Bulgaria, Lithuania, Luxembourg and Romania.

Graph I.4.3: Unemployment developments (left axis) and apparent elasticities of unemployment change to GDP growth (right axis) in the EU countries and in the US in 2011 and 2012

-1.0 -0.5 0.0 0.5 1.0 1.5 2.0 -5 -4 -3 -2 -1 0 1 2 3 ES LV LT EE SK IE EL HU PT BG EA FR PL EU US IT FI SE BE UK DK SI CZ RO DE MT CY LU NL AT

Unemployment rate change in 2011 Unemployment rate change in 2012 Elasticity to GDP growth in 2011 Elasticity to GDP growth in 2012

Source: European Commission spring 2011 forecast. Countries are ranked by descending order of unemployment rate in 2010. In 2010, Spain registered the highest unemployment rate in the European Union.