Euro area likely to reach European Commission’s structural jobless rate estimate of 9.7 pct in Q1 2017

The euro area jobless rate has touched the lowest level since 2011. Even if the unemployment rate for April seems high at first, 10.2 percent, it is just 0.5 percentage points from the EC’s estimate of the structural level, said Danske Bank in a research report.

For the actual jobless rate, the structural level of 9.7 percent is expected to be attained by the first quarter of 2017. Upward pressure on wages would rebound once the structural jobless rate is attained. However, this is likely to take a slightly longer time before wage growth recovers considerably, according to Danske Bank.

This is because the structural jobless rate is expected to be downwardly revised as it is attained. Moreover, the jobless rate does not show the level of slack in the labor market that is seen in a low participation rate within prime age males and a larger share of involuntary part-time employment.

Lastly, because of the inflexibility in wages, it might take a longer period of time before the indirect effect from the past slowdown in inflation fades away. The indirect effect on wages comes from a mixture of subdued nominal wage and indexation gaining power under low price rises, noted Danske Bank.