ECB Official Warns of Labor Market Fallout from Excessive Tightening

According to Yahoo News, European Central Bank (ECB) Governing Council member Mario Centeno cautioned colleagues about the potential labor-market consequences of excessive tightening when the economy takes a downturn. In a research piece published on the Bank of Portugal's website, Centeno observed that employment does not adjust gradually during a recession, with job destruction and hiring freezes occurring more synchronously than during upswings. He noted that it took three years to reach the pre-pandemic employment trend and that it would take less time to reverse those gains. ECB President Christine Lagarde recently mentioned 'some signs' of employment growth losing momentum, while her predecessor, Mario Draghi, speculated that the region might be in a recession. Centeno's warning comes as policymakers face rapidly weakening inflation and the possibility of investors pricing in an interest-rate cut as early as April. He emphasized the importance of monetary and fiscal policies acknowledging labor market challenges and avoiding tightening more than necessary. Centeno's analysis highlights improvements in the overall employment landscape, with workers becoming more flexible and mobile. He also noted that the labor market has effectively contained consumer-price pressures and shielded income from unpredictable inflationary shocks. Centeno believes there are few reasons to expect wage-price spirals and that a more flexible and adaptable labor market is promising news for the euro area.