Working Paper

Expanding the Labor Market Lens: Two New Eurozone Labor Indicators

Abstract: We present a principal component analysis of euro area labor market conditions by combining information from 22 labor market indicators into two comprehensive series. These two novel indicators provide a systematic view of the current state and forward-looking direction of the euro-area labor market, respectively, and demonstrate superior forecasting performance compared to existing indicators. Crucially, we find significant implications for monetary policy design: a local projection analysis reveals that ECB monetary policy shocks have attenuated effects on both inflation and unemployment when the labor market forward-looking indicator is high. The dampened inflation response calls for tighter policy rate paths than a standard Taylor rule would prescribe. Finally, we show that focusing solely on the official unemployment rate may understate the actual labor market slack, and consequently, the trade-off between labor market health and inflationary dynamics.

JEL Classification: E24; E27; J63;

https://doi.org/10.17016/IFDP.2025.1415

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 2025-08-13

Number: 1415