The Euro area labor market still shows signs of resilience in face of an across-the-board demand cooling off. Recent reports indicate that while labor demand is normalizing, the profit share of firms has reached its lowest level in 25 years, excluding the period affected by the COVID-19 pandemic. This contrast of positive employment numbers and negative profit margins is emblematic of the changing economy in the area.
Unemployment in the Euro area is projected to decrease by 0.5 ppt q/q in both 2025 and 2026. This projection signals a modestly hopeful outlook for future job growth, especially ahead of the summer job season. Look for the unemployment rate to decline modestly over the next year. That very small change is a leak in the dam, a signal that the labor market continues to strengthen. The working-age population grew by an average of 0.4 percent annually from 2022 to 2024. This expansion was overwhelmingly filled by robust foreign labor inflows.
This dramatic expansion has taken place against a backdrop of significant shrinking of the overall domestic labour force, especially in Germany. The country has persisted through other issues that have exacerbated a worsening workforce and led to fears over the nation’s long-run economic viability. The job vacancy rate has dropped through the floor. Such a decline would be from 2.9% in Q1 2024 to 2.4% in that quarter of 2025.
Some industries have shown a markedly different picture. The services sector is experiencing a historic high in vacancy at 2.7 percent, and the industrial sector’s vacancy rate is at a record high of 2.1 percent. This is a testament to the shifting demand for labor across all industries. This was most salient in the service sector, where hiring difficulties eased rapidly, decreasing from 34.1% in April 2024 to 22.9% in April 2025. Industrial constraints dropped, from 25.7% in 2016 to 18.2% today.
Experts are hopeful with these positive developments, but still cautious. This is because they expect the labor force to be growing at a slower rate than employment in coming years. This trend will continue to lead to a tighter labor market as demand for workers outstrips available supply, especially in industries and areas where it is most vital. Germany’s recent fiscal package and increased defense spending might make Europe’s leading economy even harder to read. These measures may be enough to incentivize businesses to hoard labor instead of hiring in a rush.