Expanding the Labor Market Lens: Two New Eurozone Labor Indicators

Ece Fisgin, Joaquin Garcia-Cabo, Alex Haag and Mitch Lott
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Joaquin Garcia-Cabo: https://www.federalreserve.gov/econres/joaquin-garcia-cabo.htm

No 1415, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We present a principal component analysis of euro area labor market conditions by combining information from 22 labor market indicators into two comprehensive series. These two novel indicators provide a systematic view of the current state and forward-looking direction of the euro-area labor market, respectively, and demonstrate superior forecasting performance compared to existing indicators. Crucially, we find significant implications for monetary policy design: a local projection analysis reveals that ECB monetary policy shocks have attenuated effects on both inflation and unemployment when the labor market forward-looking indicator is high. The dampened inflation response calls for tighter policy rate paths than a standard Taylor rule would prescribe. Finally, we show that focusing solely on the official unemployment rate may understate the actual labor market slack, and consequently, the trade-off between labor market health and inflationary dynamics.

Keywords: Employment; Unemployment; Labor market forecasting; European labor market (search for similar items in EconPapers)
JEL-codes: E24 E27 J63 (search for similar items in EconPapers)
Date: 2025-08-13
New Economics Papers: this item is included in nep-cba, nep-eec, nep-for and nep-lab
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1415

DOI: 10.17016/IFDP.2025.1415

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