The eurozone's unemployment rate was unchanged in August despite higher interest rates and an energy crunch driven by the war in the Middle East.
The jobless rate across the 21-member currency bloc was unchanged at 6.4% in the month, according to the European statistics agency, Eurostat. This matched a consensus of economists polled by The Wall Street Journal, and remains close to record lows of 6.2%.
The labor market has so far proved resilient despite businesses facing elevated energy prices and higher borrowing costs as the conflict in the Middle East continues. And despite short-term pressures, the European Central Bank expects the unemployment rate to fall further in the coming years, reaching 5.9% by 2028.
A solid jobs market has reflected broader strength in the eurozone economy, which expanded by 0.6% in the second quarter, outpacing the U.S. on an annualized basis.
Demographics are also helping keep unemployment low. While an ageing population and lower birth rates are limiting the supply of younger workers, higher participation rates among older employees and migration have helped to offset this decline.
"The changing composition of the labor force has exerted significant downward pressure on the unemployment rate," the ECB said earlier this year.
However, there are signs that employment growth is losing momentum, raising questions about how long the jobs market can withstand a prolonged period of high energy prices and tighter monetary policy.
While the economy grew strongly in the second quarter, employment increased by just 0.1%, suggesting that stronger economic growth has yet to translate into a substantial acceleration in hiring.
The number of unemployed people in the eurozone rose by 26,000 in August compared with July.
Still, amid a broader picture of stability in the labor market, of greater concern for policymakers is that higher energy prices generate broader inflationary pressures through wage demands. A resilient labor market could give workers greater bargaining power to seek compensation for higher living costs, potentially making inflation more persistent and complicating the European Central Bank's efforts to bring it back to its 2% target.
The ECB has responded to this risk by raising interest rates twice since the start of the Iran war. However, it has yet to find evidence that higher energy prices are feeding into wage growth.
On Monday, ECB President Christine Lagarde said that while inflation is expected to rise further in the coming months, there are few signs that the energy shock is becoming embedded in broader price pressures.
"We do not see evidence at this point in time of energy prices feeding into higher wages," she said.
Indeed, while the labor market has remained robust, employment and labor-force growth have slowed, Lagarde said. The ECB's wage tracker continues to point to slowing wage growth this year.
But much will be determined by the duration of conflict in the Middle East, as well as the ECB's interest-rate path, with the risk of second-round price effects rising the longer energy prices remain elevated. Data published this week showed inflation jumping in the eurozone's major economies. Figures for the currency bloc as a whole will be released Friday.
Higher inflation could potentially fuel wage demands even as it squeezes corporate margins and weakens demand. The likelihood of re-emerging labor shortages in Germany, the eurozone's largest economy, are also expected to add upward pressure to wages and consumer prices in the coming years, according to Ralph Solveen, an economist at Commerzbank.
Still, a prolonged energy shock could prompt businesses to curb hiring and investment, eventually weakening workers' bargaining power.
For the ECB, the challenge will be containing inflation without undermining a labor market that has so far provided an important source of resilience for the eurozone economy.