BERLIN (MNI) – The European Central Bank on Monday stressed the
need for major labour market reforms in order to win back
competitiveness of Eurozone member states.

In its report “Euro Area Labour Markets And The Crisis” the central
bank noted that downward wage rigidities are an impediment to restoring
competitiveness particularly in those Eurozone countries that had
accumulated external imbalances before the crisis.

“In the presence of high unemployment, a flexible response of wages
to labour market conditions should be a key priority, so as to
facilitate the necessary sectoral reallocation underpinning employment
creation and reductions in unemployment,” the report stated.

In this respect, short-time working schemes – although successful
in mitigating employment losses in some Eurozone countries in the
current crisis – might hinder the reallocation of the labour force from
declining sectors towards growing ones if they are maintained for too
long, the ECB reasoned.

“Also, in a context of growing mismatch in the labour market,
higher wage differentiation across different types of workers and jobs
is needed to contribute to a proper matching between labour supply and
demand and would particularly benefit some of the groups hardest hit by
the crisis,” the central bank said.

“Major labour market reforms in euro area countries are essential
to foster job creation, bring down unemployment and restore
competitiveness, while also lowering the risks of a permanent decrease
in potential output growth,” the ECB stressed.

A comprehensive reform strategy to increase labour market
flexibility is a key ingredient for a solid economic recovery in
Eurozone economies with additional positive spillovers on the correction
and prevention of macroeconomic imbalances, fiscal consolidation and
financial stability, the report said.

“In a monetary union such as the euro area, a flexible and
well-functioning labour market provides an economic environment that
greatly facilitates the price stability-oriented monetary policy of the
ECB,” it said.

Reforms which deliver greater flexibility in employment and wages
would reduce adjustment costs associated with idiosyncratic shocks and
enhance the efficiency and effectiveness of the monetary policy
transmission mechanism, the ECB said.

“Relatively limited wage adjustment has been observed in euro area
countries despite the severity of the recession,” the report observed,
though.

The issue of increasing mismatch in Eurozone economies is perhaps
one of the biggest challenges facing the labour markets of some member
states after the crisis, given the marked increase in long-term
unemployment and the persistent downsizing of specific sectors, the
central bank pointed out.

“Indeed, the report points to increasing signs of a growing
mismatch between worker attributes and job requirements across a number
of euro area countries,” the ECB said.

–Berlin bureau: +49-30-22 62 05 80; email: twidder@mni-news.com

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