FRANKFURT (MNI) – The slower decline in employment and wage costs
in the Eurozone compared with the United states during the economic
crisis suggests that the recovery of the EMU labor market will also take
longer than in the U.S., the European Central Bank said Thursday.

“Overall, hourly wages adjusted earlier and more sharply in the
United States than in the euro area,” the ECB observed in its latest
Monthly Bulletin. While that was partly due to the earlier onset of the
economic slump in the U.S., “different labor market policies and a
greater degree of wage flexibility also played a role.”

By 4Q 2009, annual wage growth in the U.S. had slowed to 0.3% from
3.4% before the downturn. In the Eurozone, hourly labor costs started to
slow later, remaining robust at around 4% in the second half of 2008 and
early 2009. By 4Q 2009, annual hourly labour cost growth returned to
levels closer to those observed before the downturn, somewhat above 2%.

One explanation is the duration of wage contracts, which average
around a year in the U.S. and two years in the Eurozone. Also, wage cuts
were more frequent and deeper in the U.S., where 5% of firms reduced
salaries and nearly half imposed a freeze. In the Eurozone, only 2% of
firms cut wages and 37% froze them.

Moreover, flexible wage schemes are more prevalent in the U.S. and,
while wage indexation to inflation is widespread in both America and
Europe, when prices are falling, downward adjustments are harder to
implement in Europe.

In addition, the labor market contracted sooner and faster in the
U.S. than in Europe. From late 2007 to March 2010, the U.S. jobless rate
surged more than five points to 9.7%. In the Eurozone, it rose by less
than three points from 2008 to March, reaching a decade high of 10%.

Finally, several countries in Europe made use of short-time work
schemes, which allowed firms to preserve jobs at reduced hours with the
help of government subsidies, notably in Germany and France. In the
U.S., such schemes are limited and have only “marginal” impact on hourly
labor costs, the ECB noted.

“Looking ahead, hourly labor cost growth is likely to remain weak
in the United States and decrease further in the euro area, where
further downward adjustment is also expected in terms of employment in
the context of a continued lagged response to the recent recession,” the
ECB said.

“While labor market rigidities and pro-employment policies in the
euro area have warded off a sharper reduction in employment, the
necessary adjustment in labor costs may have only been delayed and might
thus extend further into the recovery,” it concluded.

–Paris newsroom +331 42 71 55 40 e-mail stephen@marketnews.com

[TOPICS: M$X$$$,M$$EC$,MGX$$$]