Labour Market Remains Tight

Germany's tight labour market following the pandemic can be illustrated through estimates of the Beveridge curve, plotting unemployment against job vacancies.

• In both the pre-Covid (blue dots) and post-Covid (orange dots) period, the curve has an expected downward slope, where unemployment is higher when the vacancy rate is lower.
• In 2022 and 2023, the vacancy rate in Germany has been persistently above 4%, while unemployment has generally been in the low 5-6% range.
• These observations lie in the top-left portion of the Beveridge curve charted below, indicating a tight labour market, where labour demand exceeds the supply of unemployed workers. The curve for the Eurozone as a whole looks similar, but Germany is to the upper left of it.
• Against this backdrop, German wage growth has been strong, helping fuel inflation concerns, both domestically and for the Eurozone as a whole.
• There are signs in some areas of the German economy that suggest demand for labour has begun to cool. The manufacturing employment outlook has turned negative, and overall unemployment claims are rising, alongside a decline in vacancies. However, service sector employment continues to look strong and there's little sign that a major deterioration there is underway.
• The bigger picture therefore is that while the German labour market is not as hot as it was in mid-2022, it remains too tight for comfort on the wage inflation side. We'll explore these themes in more depth in future notes.