A Light at the End of the Tunnel for Europe? - Modern Distribution Management

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A Light at the End of the Tunnel for Europe?

Shifts in labor costs may signal a change in Europe's economic woes.

While bad news continues to dominate the message about the European economy – Spain's government bonds continue to rise, the U.K. has slid into recession, etc. – there may be one "light at the end of the tunnel," according to a report from The Conference Board: labor costs are starting to go down.

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"A drop in unit labor cost is an important sign of the beginning of adjustments in Europe’s most trouble economies,” said Bart van Ark, The Conference Board Chief Economist and co-author of the report. “For now it is mainly the reduction in wages which leads the adjustments, but once productivity begins to increase as well, it could be the key to a more sustainable recovery.”

For the most troubled countries in the Euro Area, controlling unit labor cost (ULC) – defined as nominal labor compensation per unit of real output – has started to decline after years of increases. In Greece, for example, ULC rose 4.4 percent between 2008 and 2011. But from 2010 to 2011, ULC in Greece fell more than 5 percent.

It will still be a long time before the European economy recovers, but this is one of the first signals that the tides may be shifting in the right direction.

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