Employment in the Euro Area was down in the first quarter – Weak Internal Demand could be the Culprit

Employment retreated again in the Euro Area during the first quarter of this year. It dropped by 1.8% (annual rate) and was down for the seventh quarter in a row. Since the local peak in the 2nd quarter of 2011 it is decreasing at a -0.9% annual pace. It’s quicker than GDP which is down at a -0.8% pace.


The second chart shows the recent employment divergence between the Euro Area and the United States. The gap between the two curves is not so wide at the beginning of 2013 but since 2011 each profile follows its own dynamics. It was not the case before 2011 where the two profiles were consistent even if change in employment was more volatile in the USA during the 2008/2009 recession following the Lehman bankruptcy.


Since 2011 profiles follow divergent path. Employment follows an upward trend in the USA (even if it’s slower than it used to be – See here the analysis by Menzie Chinn, Laurent Ferrara and Valérie Mignon) while Euro Area employment is on a downward trend for the 7th consecutive quarter.

The two following charts show the interactions between employment and internal demand. Charts with internal demand one quarter ahead suggest that internal demand is a strong determinant to the employment profile. This means that as long as internal demand is trending downward in the Euro Area we cannot expect a U-turn on employment. European Commission recommendations to rapidly converge to the 3% budget deficit threshold will not change the current demand trend*. Employment will continue to retreat


*The European Commission has postponed the 3% target for countries like France (for 2 years) or Spain (for 3 years) because the convergence to this threshold  was not possible due to the recession in the Euro Area. The EC had too optimistic forecasts for 2012 and 2013. According to the EC, the new forecasts for 2014 and 2015 will make this convergence possible but the spirit has not changed.