Employment in the euro zone is rising faster than expected and this may continue, but at a cost to productivity and potentially to long-term economic growth, European Central Bank research shows.
Employment in proportion to GDP growth is now rising as fast if not faster than before the 2007 debt crisis, particularly in places like Germany and Spain where labour market reform has increased flexibility, the research said.
But euro zone unemployment is still hovering around 10% and youth unemployment above 20%.
Policymakers have been concerned that a large part of a generation may fall out of the labour market permanently, a costly legacy of the crisis that weighs on state coffers and may take decades to resolve.
ECB research now indicates that countries are getting people back to work quicker than earlier hoped.
This is partly due to the increasing popularity of part-time work and the rapid expansion of services-based sectors, which tend to hire more people and operate with a more flexible workforce.
The pre-crisis ratio of jobs to GDP growth, which was roughly 0.5% more employment for 1% of GDP expansion, has improved in the past three years after a period of disconnect.
Germany and Spain have accounted for about two-thirds of the gains since mid-2013, the research showed.
"Stronger employment growth has doubtless provided support to household incomes, but has also further weakened aggregate productivity growth, which was already notably weaker - even at the sectoral level - than in the pre-crisis period on both sides of the Atlantic," the ECB said.
"These common trends in productivity growth may imply risks to the long-term growth outlook," it added.
The problem is that the bulk of the new jobs are in services, where productivity growth is already modest, which puts a drag on overall productivity.
Average hours worked are stagnating, so more people are employed but work less than before the pre-crisis years, a sign of underemployment.
The shift in the economy toward services and more flexible labour markets, however, suggest that stronger employment growth could persist, the ECB added.