Employment and the conduct of monetary policy in the euro area

Occasional Paper Series

Work stream on employment Employment and the conduct of monetary policy in the euro area

No 275 / September 2021

Disclaimer: This paper constitutes staff input into the Governing Council's deliberation in the context of the ECB's monetary policy strategy review. This paper should not be reported as representing the views of the Eurosystem. The views expressed are those of the authors and do not necessarily reflect those of the Eurosystem.

Acknowledgements

This report has been jointly produced by the Eurosystem work stream on employment comprising staff from the European Central Bank (ECB) and the national central banks (NCBs) of those countries that have adopted the euro. The report fed into the Governing Council's deliberations on the monetary policy strategy review 2020-21.

Co-leads of the workstream
Claus Brand	Meri Obstbaum
European Central Bank	Suomen Pankki - Finlands Bank
email: [e-mail]	email: [e-mail]
Günter Coenen	David Sondermann
European Central Bank	European Central Bank
email: [e-mail]	email: [e-mail]
Reamonn Lydon
Central Bank of Ireland
email: [e-mail]
Contributors
Viktors Ajevskis	Felix Hammermann
Latvijas Banka	European Central Bank
Siria Angino	Nils Hernborg
European Central Bank	European Central Bank
Henrique Basso	Matthias Hertweck
Banco de España	Deutsche Bundesbank
Gert Bijnens	John Hutchinson
Nationale Bank Van België/Banque Nationale De Belgique	European Central Bank
Elena Bobeica	Pascal Jacquinot
European Central Bank	European Central Bank
Katalin Bodnár	Andrew Kanutin
European Central Bank	European Central Bank
Vasco Botelho	Alex Karsay
European Central Bank	Národná banka Slovenska
Andrea Colciago	Daniel Kienzler
De Nederlandsche Bank	Deutsche Bundesbank
Agostino Consolo	Aleksandra Kolndrekaj
European Central Bank	European Central Bank
Marta De Philippis	Stéphane Lhuissier
Banca d'Italia	Banque de France
António Dias Da Silva	Julien Le Roux
European Central Bank	European Central Bank
Maarten Dossche	Matija Lozej
European Central Bank	European Central Bank
Stéphane Dupraz	Fernando Martins
Banque de France	Banco de Portugal
Juraj Falath	Falk Mazelis
Národná banka Slovenska	European Central Bank
Alessandro Ferrari	Francesco Mongelli
Banca d'Italia	European Central Bank
Sandra Gomes	José Montero
Banco de Portugal	Banco de España
Ramon Gomez Salvador	Roberto Motto
European Central Bank	European Central Bank
Gavin Goy	Anton Nakov
De Nederlandsche Bank	European Central Bank
Adriana Grasso	Steffen Osterloh
Banca d'Italia	European Central Bank
Elisa Guglielminetti	Myroslav Pidkuyko
Banca d'Italia	Banco de España
Markus Haavio	Celine Piton
Suomen Pankki - Finlands Bank	Nationale Bank van België/Banque Nationale de Belgique

Gasper Ploj	Jirka Slacalek
Banka Slovenije	European Central Bank
Marios Polemidiotis	Andrej Sokol
Central Bank of Cyprus	European Central Bank
Maximilian Propst	Michel Soudan
European Central Bank	European Central Bank
Pedro Luis Rebelo Neves	Bela Szörfi
European Central Bank	European Central Bank
Annukka Ristiniemi	Dominik Thaler
European Central Bank	Banco de España
Manuel Bernado Rodrigues Pereira	Juuso Vanhala
Banco de Portugal	Suomen Pankki - Finlands Bank
Arthur Saint-Guilhem	Anders Warne
European Central Bank	European Central Bank
Ana Seco Justo	Anastasia Zhutova
European Central Bank	Banque de France
Domingos Seward
Banco de Portugal

This report is part of a set of papers within the ECB's Occasional Paper Series, related to the ECB's Strategy review 2020-21. This set includes the following papers:

Set of Occasional Papers related to the ECB's Strategy review 2020-21

No 263, "The implications of globalisation for the ECB monetary policy strategy". No 264, "Inflation expectations and their role in Eurosystem forecasting".

No 265, "Inflation measurement and its assessment in the ECB's monetary policy strategy review". No 266, "Digitalisation: channels, impacts and implications for monetary policy in the euro area".

No 267, "Review of macroeconomic modelling in the Eurosystem: current practices and scope for improvement". No 268, "Key factors behind productivity trends in EU countries".

No 269, "The ECB's price stability framework: past experience, and current and future challenges".

No 270, "Non-bank financial intermediation in the euro area: implications for monetary policy transmission and key vulnerabilities". No 271, "Climate change and monetary policy in the euro area".

No 272, "The role of financial stability considerations in monetary policy and the interaction with macroprudential policy in the euro area". No 273, "Monetary-fiscal policy interactions in the euro area".

No 274, "Clear, consistent and engaging: ECB monetary policy communication in a changing world". No 275, "Employment and the conduct of monetary policy in the euro area".

No 276, "The mandate of the ECB: Legal considerations in the ECB's monetary policy strategy review". No 277, "Evolution of the ECB's analytical framework".

No 278, "Assessing the efficacy, efficiency and potential side effects of the ECB's monetary policy instruments since 2014".

No 279, "The need for an inflation buffer in the ECB's price stability objective - the role of nominal rigidities and inflation differentials". No 280, "Understanding low inflation in the euro area from 2013 to 2019: cyclical and structural drivers".

Contents

Abstract		4
1	Introduction	5
2	Full employment concepts and the Phillips curve	7
	2.1	Introduction	7
	Box 1 The importance of unemployment in citizens' priorities and
		perceptions	9
	2.2	Labour market indicators and full employment	12
	2.3	Structural determinants of the level of full employment	15

2.4 Inferring labour market slack or tightness from a price stability

	perspective	16
Box 2 Friedman's plucking theory and its implications for assessing
	employment slack	19
2.5	The Phillips curve	21

2.6 Measurement, non-linearity and missing pass-through from

		wages to prices	24
3	Labour market heterogeneity and hysteresis effects	31
	3.1	Introduction	31
	3.2	Dimensions of labour market heterogeneity	32
	3.3	What are the structural drivers behind heterogeneity?	33
	3.4	Common drivers of heterogeneity	36
	3.5	Labour market heterogeneity and the business cycle	39
	Box 3 Labour markets and fiscal support during the COVID-19
		pandemic	45
	3.6	Nature of labour market shocks	49
	3.7	Shocks, hysteresis and policy	51
	3.8	Risks of cyclical shocks becoming more structural	57
4	Inflation and employment: trade-off considerations for monetary
	policy		59

ECB Occasional Paper Series No 275 / September 2021

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