Friday, 25 January 2013

GDP growth and employment growth : implications for Greece

A facile and quick post for tonight. I was thinking about employment lately and how much Greece is suffering in this respect. A good question is this one: if and when GDP has bottomed when will employment bottom out?

If we look at aggregate figures regarding the Euro Area 12 then we can see that employment always lags GDP by a few quarters.

source: Eurostat

By looking at the chart above one could be misguided into believing that this lag is a couple of quarters. I guess that this depends on a number of factors as well, for example labour laws (not getting into this thorny subject here), the overall state of the economy in question, the international environment, etc.

Aggregate Euro Area data are skewed by the strong influence of Germany. I think it would be more interesting to look at the peripheral countries.

Here’s Spain.

source: Eurostat

Before the depression set in, employment and GDP moved in tandem, something that could be explained by the fact that most job losses in 2008-2009 originated from the construction sector where shocks are transmitted very fast. When GDP grew again in 2010 (due to the base effect no doubt) the economy kept shedding jobs. The reasons are rather obvious and give the message that in the current environment the rule above, has to be augmented and relaxed in the way that the lag between the two could be much larger.

Now let’s take a look at Ireland.

source: Eurostat

The economy has been growing anemically for two years so the base effect has run its course. But employment hasn’t grown at all since GDP growth turned positive. As if the generally present low visibility, uncertainty and stagnation isn’t enough, Ireland is plagued by a monster-sized balance sheet recession and the deleveraging efforts attached to that, which makes it even more difficult for businesses to hire again.

Since trying to gauge what would happen to Greece was my goal when deciding to write the post, here’s the chart about Greece (data concerning Greece are not seasonally adjusted because they’re the only ones available in quarterly format).

source: Eurostat, ELSTAT

As you can see, calling the situation dreadful is a euphemism. The question is: at what point we could hope to witness employment growth in Greece. If the usual rule is applied then a lag from the time that GDP growth turns positive could be expected and what’s more, if visibility is still low then we could wait a while longer than that. Is there a chance that due to the credit squeeze and the fact that Greek corporations were forced to become lean we could see a swift acceleration in hiring due to some pent-up demand for labour? Bear in mind that this is Greece we’re talking about, where the vast majority of businesses belong to the micro class and struggle to survive and become more internationally aware. I personally rule out such a scenario, so buckle up, we could be in for a long wait here... 

P.S. Of course all this is fiction right now, but I hope you agree that thinking out loud about it was worth it.

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