Remarks by Christine Lagarde, President of the ECB, at the Economic Policy Symposium “The policy implications of labour market transition” organised by the Federal Reserve Bank of Kansas City in Jackson Hole
Jackson Hole, 23 August 2025
Alexis de Tocqueville once wrote: “History is a gallery of pictures in which there are few originals and many copies.”
In monetary policy, we look to past cycles for guidance, but this cycle has proven unique.
Major central banks have engaged in significant tightening recently. Initially, there were concerns about its impact on labour markets.
Historically, disinflation has incurred a cost. Since the 1960s, lowering inflation by 1% has cost about 1% of GDP.
With Europe’s structural rigidities, it was assumed that tightening could lead to rising unemployment, potentially becoming entrenched through hysteresis effects.
Even in the U.S., with a more flexible labour market, many feared a rise in unemployment would be necessary to control inflation.
Instead, inflation has fallen sharply in both the euro area and U.S., with minimal employment cost.
In fact, the euro area has defied hysteresis: employment growth has outpaced historical predictions.
Okun’s law suggests employment grows at roughly half the pace of GDP. Yet, from late 2021 to mid-2025, employment rose by 4.1% with GDP at 4.3%, showing an employment elasticity nearly double Okun’s law.
The question for policymakers is why this atypical employment response has occurred – and its implication on how inflation responds to shocks.
Partly, this is due to global factors: monetary tightening coincided with easing supply constraints, lower energy prices, and proactive fiscal policies, leading to a low sacrifice ratio.
Europe’s labour market performance has been shaped by three features.
First, delayed wage response to inflation supported higher employment; second, a reduction in hours worked; and third, expanded labour supply meeting rising demand.
The response of real wages to inflation
The euro area faced a negative supply shock with post-pandemic bottlenecks and the cut-off of Russian gas. Historically, such shocks would have quickly affected nominal wages.
After the oil shocks of the 1970s, real wages in Europe rose significantly compared to productivity. During major demand shocks, a similar pattern emerged.
This time, real wages fell by nearly 2% between 2021 and 2023, catching up with productivity growth gradually.
European labour markets have become more flexible while retaining some rigidity.
Automatic wage indexation has almost disappeared, covering only 3% of private sector employees. However, 60% of workers are under multi-year agreements that adjust wages gradually to inflation.
This delayed wage response acted as a shock absorber, easing unit labour cost pressures and supporting profitability, making labour more attractive than capital.
The “factor substitution” effect contributed significantly to employment growth since 2019, particularly after the energy crisis onset.
This was crucial in manufacturing, hit harder than services by negative shocks. Yet, manufacturing employment remained above Okun’s law predictions.
Firms’ ability to pass on higher input costs increased profit margins and led to a steeper fall in sectoral real wages. In countries with automatic wage indexation, real wages declined less, and the link between output and employment was weaker.
The reaction of hours worked
The increase in employment in the euro area coincided with a decline in average hours worked.
Average hours are 1% below pre-pandemic levels, equivalent to approximately 1.3 million full-time jobs.
Two factors explain the rise in employment despite fewer hours worked.
First, labour hoarding curbed job losses but reduced hours worked.
The labour hoarding indicator peaked in late 2022, reflecting market tightness and fears of future shortages.
Declining real wages and high profit margins supported this strategy.
Second, worker preferences shifted to shorter hours, restricting firms’ ability to increase hours per employee.
Average hours worked in Europe have long declined, mainly due to increased
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