Buoyant employment growth, despite sluggish activity, reflecting a significant multi-year adjustment - July 2017

Surprisingly buoyant employment growth, despite sluggish activity, reflecting a significant multi-year adjustment

The Greek labor market performed surprisingly well in H2:2014-Q1:2017, in non-supportive output growth conditions. During this period, employment in the private sector increased by 5.2% (+150k jobs), reversing about 14% of the 1.1 mn job losses during 2009-13.

An empirical analysis of employment drivers suggests a strong role for labor market reforms and an increase in the economy's competitiveness:

• The significant adjustment in unit labor costs, which reversed the deterioration during the previous decade, in conjunction with intensive business restructuring, supported firms' hiring decisions in a period of subdued demand;

• The increasing use of part-time and fixed time contracts led to labor mobility, as Greek firms – especially smaller ones – took advantage of the flexibility, with a view to adapting to the volatile macroeconomic conditions and streamlining productions costs;

• The strong performance of export-oriented sectors partly compensated for the weakness of the non-tradable sectors, resulting in an increasing share of tradables in activity and employment;

• The switch from self-employed and unpaid family workers to dependent employment reduced informal activity, contributing to an increase in registered employment and labor incomes;

• Some of the latest trends in the Greek labor market, such as the pick-up in full-time wages, along with nascent signs of recovery in business activity, indicate that the adjustment process is entering a new phase.                                                                                                                                                                                   

Future employment growth will be primarily based on further rebalancing towards the higher value-added tradables sectors, which requires a recovery in investment to bring the labor-to-business capital ratio closer to its long-term average compared with its current extremely high level (23% higher than its 30-year average in 2016).

In our baseline scenario, projecting average GDP growth of 2.0% in 2017-2019 underpinned by (i) an average growth in business investment of 8.5% per annum, (ii) maintenance of relative cost competitiveness, and (iii) a further decline in informal activity, employment will increase by 230k jobs in 2017-19 (+6.2% cumulatively), with the unemployment rate declining to below 18.5% by end-2019.