The post-pandemic economic recovery in the euro area was marked by robust employment growth and modest increases in value-added. As a result, productivity stagnated. This paper uses a three-input production model (intermediate goods, labour and capital) to assess whether these developments can be attributed to shifts in the relative prices of production factors.
Supply chain disruptions, the energy crisis and the monetary policy response have caused the prices of intermediate goods and capital to surge, favoring labour-intensive production processes. We estimate that the relative price shock explains the productivity slowdown in 2022-23 and that this effect may be prolonged due to the lagged adjustment of the factor mix and, above all, of capital endowments.
