Slack vs. tightness in euro area labour markets: Growing mismatch after COVID-19?

Abstract This paper aims to interpret labour market developments across the euro area in the wake of the COVID-19 pandemic, notably the simultaneous presence of signs of labour market slack and labour market tightness in 2021. Indicators of labour market slack and mismatch are reviewed and discussed. The Beveridge curve relationship is estimated econometrically across euro area countries to assess if upward shifts took place after the COVID-19 outbreak, since such upward shifts could indicate a possible reduction in the efficiency of matching between jobs and job seekers. As compared with previous analogous analyses (e.g., Börsch-Supan 1991; Wall – Zoega 2002; Valletta 2005; Consolo – Dias 2019) the present analysis addresses the issue of residual autocorrelation present in standard Beveridge specifications and includes skill and sectoral mismatch indicators as additional controls. The results indicate a modest and temporary upward shift in the Beveridge curves of the euro area in 2020, reversed in 2021. Even though skill mismatch temporarily increased somewhat in the wake of the COVID-19 pandemic, this appears to have had a very minor impact on the efficiency of labour market matching. Overall, the available evidence suggests that the simultaneous presence of labour market slack and tightness was a temporary phenomenon. The sharp increase in labour shortages was driven mainly by a sudden labour market recovery in a context of reduced labour supply elasticity rather than by a structural reduction in matching efficiency and major labour market reallocation needs.