More jobs in Italy, but no wage gains going forward

The announcement that the Italian unemployment rate dropped significantly in July attracted the attention of many market participants., however, we should not read too much into this development, because, some 0.4ppt of the 0.5ppt drop was attributable to a reduction in the participation rate. A lot of Italians stopped looking for a job and left the labour force. The number of inactive persons surged by a significant 131k, making the unemployment rate looks artificially smaller over the survey period. In other words, if the participation rate had not changed from June to July, the jobless rate would have dropped by a mere 0.1ppt.

Each month, the Italian labour force survey data undergo thorough revisions (in particular as part of the continuous adjustment of seasonal factors), affecting each point of the unemployment rate series. Most of the time ignored by the markets, these revisions can be extremely significant. For example, first evaluated at 13.4%, the November 2014 jobless rate was revised to 13.3% one month later and then to 13.0% in April 2015 (unchanged since then - see chart 2). Thus, drawing conclusions from a single unemployment release in Italy is risky, to say the least.

To be clear, motive was found for satisfaction in the report (for example the youth unemployment rate down 2.5 pp in one month, or the cumulative addition of about 100k workers since January). It is just that we chose to remain cautious in interpreting the data, as we are aware of their flaws, as well as of the danger of taking the headline unemployment number at face value.

"Besides, the July development was, in our view, rather at odds with what the Italian labour market will experience in the coming quarters, namely a combination of employment gains, higher participation and productivity, with an uncertain impact on the jobless rate", says Societe Generale.