The Unemployment Rate Illusion: Europe
The labor market in Europe is improving at a rapid pace as their economies open up after their second Covid related shutdown; with the unemployment rate dropping from a pandemic peak of 7.7% to 7.3%. While this seems good on the surface, how do things look underneath?
The unemployment rate rarely tells the whole story, and can sometimes create an illusion that all is well when broader problems are brewing beneath the surface, like in the United States.
Therefore, while improvements in EU employment levels do reflect job gains that are occurring on one level of the economy, we have to look at the labor force participation rate to get a more holistic understanding of what is happening.
On a quarterly basis (the data to calculate the labor force participation rate is only available at a quarterly frequency), we can see that the Europeans are facing the same problem as their American counterparts. Namely, the unemployment rate is coming down, but the labor force participation rate isn’t.
While this can be more clearly seen in American data due to a higher frequency of reporting, the same pattern can be observed in the EU chart above. After a strong initial bounce higher in the labor force participation rate, it levels off and ceases to improve in a meaningful way, even as the unemployment rate continues to trend lower.
The same can be observed in Euro Area data.
As such, Europe is experiencing the same problems as the US, where over the past year, labor market conditions deteriorated to a point where many people simply gave up looking for work. Statistically, this means that they have dropped out of the labor force (in Eurostat’s terminology, they are “Inactive”) and are no longer counted as unemployed – since one has to be looking for a job in order to be counted as being unemployed.
Needless to say, the longer these folks remain out of the labor force, and unable to re-enter due to the lack of a robust enough recovery, the higher the potential for permanent damage.
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