FRANKFURT (Reuters) – Europe is running out of available workers and sweeping changes are needed, otherwise a hot labour market will keep pushing inflation higher, making it harder for the European Central Bank to contain price pressures, Bundesbank President Joachim Nagel said.
Euro zone employment is at a record high despite a recession over the winter and firms are increasingly struggling to find workers, particularly in the services sector, which tends to be more sensitive to wages and thus more prone to push inflation higher.
This could then have broader ramifications for the conduct of monetary policy, Nagel warned.
“A changed environment for monetary policy could also result from persistently tight labour markets,” Nagel said in a speech on Thursday. “A greater bargaining power of workers could lead to strong wage growth and thus persistent inflationary pressures.”
The ECB has raised rates by a combined 4 percentage points in the past year and promised another rate hike in July as price pressures are even more persistent than feared.
Demographics are also working against the ECB. The working age population is shrinking in several countries, including in Germany, the bloc’s biggest economy, leading to even more labour scarcity.
This puts the onus on governments rather than the central bank to find a solution.
Governments must provide stronger incentives for women in part-time employment to work longer, which will require better childcare, Nagel argued.
Europe must also promote the immigration of skilled workers and needs to simplify the recognition of foreign degrees and professional qualifications.
Older people should also be given greater incentives to work and a higher retirement age should also be considered, Nagel argued.
Repeating his stance on current monetary policy, Nagel said that rates have not yet peaked and once they do, they must stay elevated for an extended period, until the ECB is sure that high inflation is extinguished.
“Breaking inflation requires vigorous action as well as perseverance,” Nagel said.
(Reporting by Balazs Koranyi; Editing by Toby Chopra)
