The refugee wave has hit the European Union at a time when its economy is recovering from the effects of the coronavirus pandemic. Thanks to the response of the European Central Bank (respectively national central banks) and governments, it was possible to maintain strong domestic demand for goods and services. Government programs focused mainly on maintaining the highest possible level of employment, the relaxed policy of central banks acted as a supportive policy aimed at more or less the same goal. From this point of view, we can therefore consider the current state of the labor market in the European Union to be ready to absorb additional labor force.
However, inflation rates in many countries of the European Union and the euro area have reached the highest levels in the last few decades. This leads economic policy makers (governments and central banks) to wonder how much it is necessary to fight this inflation. It is practically certain that the European Union's economy will be affected by so-called stagflation, ie a combination of stagnation (or a decline in GDP) and rising inflation.
Representatives of governments and central banks will therefore face the choice of focusing their policies more on curbing inflation or more on curbing the slowdown in economic performance. A compromise is likely to be chosen that translates partly into a reduction in GDP and partly into a temporarily higher rate of inflation.
Right here it is necessary to draw attention to the risks that arise for the labor market. A more or less restrictive economic policy, combined with a decline in the purchasing power of wages, will inevitably lead to a dampening of aggregate demand, which will almost certainly have a negative impact on the labor market. While companies in many countries today are desperately looking for employees, the situation may turn around in a matter of months.
On the other hand, the influx of labor force from Ukraine may affect the European Union's economy as a positive supply shock. As the EU labor market is under relatively high tensions (the unemployment rate reached 6.2 percent in January 2022, and was even lower than before the pandemic), the new workforce may relieve it, helping to reduce inflationary pressures.
To a large extent, it will also depend on the qualification structure of Ukrainian refugees. It is clear that not only low-skilled people will be among them. On the contrary, it is very likely that there will be a large representation of highly qualified people among them. There is therefore a chance that if the refugees succeed quickly, the effects of their arrival on the EU labor market will be rather positive.
Analysis by Aegean Equity
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