(Bloomberg) — European Central Bank Governing Council member Mario Centeno warned colleagues that labor-market fallout from too much tightening can be precipitous when the economy turns.
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In a research piece published on his central bank’s website on Monday, the Bank of Portugal governor observed that employment doesn’t adjust gradually as a downturn takes hold.
“Job destruction and the freezing of new hires are more synchronized in recessions than during upswings,” he said. “It took three years to reach the pre-pandemic employment trend; it will require less time to reverse those historical gains.”
While joblessness remains at a record low in the euro region, ECB President Christine Lagarde told lawmakers last week that there are “some signs” that employment growth may start to lose momentum. Her predecessor, Mario Draghi, recently speculated that the region may be in a recession.
The warning from Centeno, one of the ECB’s more dovish officials, arrives at a time when policymakers are confronting a rapid weakening in inflation, combined with the prospect of investors pricing in an interest-rate cut as soon as April. Some colleagues insist that borrowing costs might need to be lifted again.
“Monetary and fiscal policies must acknowledge the labor market’s challenges,” he said. “Preserving workers’ investments and aspirations is incompatible with tightening more than necessary.”
The analysis by Centeno — a labor-market economist before he ultimately became finance minister and governor — generally notes improvements in the overall employment backdrop.
Workers have become more flexible and mobile, he says, notable given initial fears at the creation of the euro about the lack of willingness and ability for employees to move in search of jobs. Centeno also observes that the shift has “effectively contained” consumer-price pressures.
“The labor market has functioned as a safeguard, shielding income from the unpredictable impacts of exogenous, supply-driven, inflationary shocks,” he said. “If it would not have been for the employment created, inflation and stagnant growth would have spelled ‘stagflation.’”
The ECB is watching closely now for a reaction in pay to the cost-of-living shock of the past couple of years. However, there are few reasons to anticipate wage-price spirals, according to Centeno.
“The fight against inflation needs market adjustments that do not fuel price pressures,” he said. “A more flexible and adaptable labor market is promising news for the euro area, and the wage data supports this observation.”
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